Parents who want to assist their children in paying for college can pick between government and private student loans. While comparing your alternatives while choosing a student loan is always vital, it is more critical as a parent. Because you may have to make a tradeoff when selecting a loan kind.
The U.S. Department of Education offers federal parent PLUS loans with higher interest rates and higher origination fees than other federal loans, but they also offer generous repayment periods and access to forgiveness programs. Private lenders who give loans to parents may charge cheaper fees and, in some cases, lower interest rates for the most creditworthy borrowers, but they provide considerably less flexible repayment alternatives.
Understanding Parent Student Loans
Parent student loans are federal loans offered by the U.S. Department of Education to parents of dependent undergraduate students. These loans are designed to help parents bridge the gap between available financial aid and the cost of their child’s education. Parent student loans can be a valuable resource for families who want to contribute to their child’s college expenses without compromising their child’s access to education.
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Key Features and Benefits
Parent student loans come with several features and benefits that make them an attractive option for families:
- No Borrowing Limit: Parents can borrow up to the cost of attendance minus any other financial aid received by the student.
- Fixed Interest Rates: Parent PLUS loans have fixed interest rates set by the government. These rates are the same for all borrowers and remain consistent throughout the life of the loan.
- Flexible Repayment Options: Parents have the option to choose from various repayment plans, including standard, extended, and income-driven plans. This flexibility allows parents to select a plan that aligns with their financial situation.
- Check: While parent student loans require a credit check, the credit criteria are generally less strict compared to private loans. Adverse credit history does not automatically disqualify parents from eligibility.
Eligibility and Application Process
To be eligible for a Parent PLUS loan, parents must meet the following criteria:
- Be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time in an eligible program.
- Have a valid Social Security number.
- Not have an adverse credit history (unless they qualify for a creditworthy endorser).
To apply for a Parent PLUS loan, parents should follow these steps:
- Complete the Free Application for Federal Student Aid (FAFSA).
- Log in to the U.S. Department of Education’s student aid website to apply for the Parent PLUS loan.
- Undergo a credit check during the application process.
- If approved, sign a Master Promissory Note (MPN) to agree to the loan terms and conditions.
Responsible Borrowing Considerations
While parent student loans provide financial support, responsible borrowing is essential to ensure both parents and students are not burdened by excessive debt:
- Evaluate Affordability: Before taking out a loan, assess your financial situation and determine the amount you can comfortably borrow without jeopardizing your own financial stability.
- Open Communication: Have open and honest conversations with your child about the financial responsibility associated with the loan and any expectations for repayment.
- Consider Alternatives: Explore all available financial aid options, including scholarships, grants, work-study programs, and federal student loans, before turning to parent student loans.
- Budgeting: Create a budget that includes loan repayment to ensure you can manage the monthly payments alongside other financial commitments.
A parent loan is money a student’s parent or guardian borrows to help pay for school. The loan is entirely in the parent’s or guardian’s name and they are taking full responsibility for repaying the loan. Like other student loans, a parent loan is used to cover college-related costs, such as tuition, supplies, or room and board.
There are two parent student loan options:
Each have different application processes and requirements, so let’s take a closer look and then explore some of the benefits and drawbacks.
What Is a Parent PLUS Loan?
The PLUS Loan for parents is the only parent-specific federal student loan. They come with a fixed interest rate and a standard repayment term of ten years. Parents can borrow up to the cost of attendance, minus other financial aid the student receives. Funds are disbursed directly to the school.
According to the Department of Education, a parent eligible for a Parent PLUS student loan must be the biological or adopted parent of a dependent undergraduate student. Grandparents and legal guardians do not qualify to take out parent loans unless they have lawfully adopted the student.
Even though parent PLUS loans share many of the same features as other federal student loans, there are some important differences.
Federal parent PLUS loans don’t come with an automatic grace period, so payments will be due as soon as funds are disbursed to the school. They also are not eligible for the popular income-based repayment program (IBR).
And, unlike other federal student loans, parents applying for a PLUS loan must undergo a credit review.
How Do I Apply for a Federal Parent Plus Loan?
The first step is for parents to fill out the FAFSA (Free Application for Federal Student Aid) with their child.
Then, there is a separate application for Direct PLUS Parent Loans, which must be submitted. Most schools use an online application form, but some have their own process, so be sure to ask the financial aid office.
What Credit Score Do You Need for a Parent PLUS Loan?
There is no specific credit score requirement to get Parent PLUS Loan, however a credit review is required to check for any adverse credit history such as bankruptcy, repossession, and foreclosures. Check the Federal Student Aid website for specifics.
What Is a Private Parent Loan?
A private parent loan is issued by a non-government entity like a bank or credit union to a qualifying parent or guardian of an undergraduate college student to help pay for school-related expenses.
Private lenders each have their own terms, eligibility criteria, applications, and interest rates, which can be fixed for variable. Typically, these are determined through factors such as credit history and income review.
Benefits and Drawbacks of Parent Loans
Parent student loans have several useful applications but as with all loans, it’s important to fully understand the terms.
Benefits
Parents want to see their child excel in school, and many want to help by paying a portion or all of college. Reducing a student’s post-graduation debt with a parent loan can help them focus on school, kick start a career, and prepare them for their next big investment such as a car or home.
Parents carry the full responsibility to repay the parent loan but they can ask their children to contribute without being subject to the same responsibilities as they would if the loan was in the student’s name. This gives them the experience of paying bills and borrowing without having to take on the risk.
Another benefit is that interest on all student loans, including parent loans, is tax deductible. Borrowers may be able to deduct a portion or all of the amount of parent student loan interest paid.
Drawbacks
One of the biggest pitfalls of a parent loan is the financial obligation the parent accepts. Making on-time payments can help your credit score, but missing or late payments can also hurt your credit.
Cosigning as a Borrowing Option for Parents
While a parent loan gives full responsibility for repaying the loan to the parent, cosigning gives an equal obligation to the cosigner and the borrower. The loan will appear on both credit reports and payment history – good and bad – will affect both people on the loan. Most undergraduate students don’t have the credit history to qualify for private student loans on their own and are likely to need a cosigner.
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Where Do Parent Loans Fit into the Financial Aid Picture?
It’s important to explore all of your options, talk to loan providers and consult with university financial aid officers to make smart financial choices for you and your family.
Parent loans are only one of the tools that can be used to pay for college. Before considering any type of loan, parents should encourage their child to find aid that does not need to be repaid such as grants and scholarships. Then they can consider using any savings or income to cover the costs. If there’s still a gap in funding, a parent loan might make sense if you can afford and are comfortable taking full responsibility of repaying the loan.
Repaying student loans as a parent
Parents have a variety of repayment options with the federal Parent PLUS loan and private parent student loans. Some options allow you to begin repaying the loan while your child is still in school. Other plans allow you to wait until they are out of school. You’ll want to consider those terms carefully to be sure to find the plan that works best for you.
After your child graduates, you can even refinance Parent PLUS loans in your child’s name. But, of course, this will only work if your child agrees to it, meets certain criteria, and if they can qualify for a loan on their own.
If you take a student loan out in your name, there is no way to force your child to refinance the loan payments in their name. However, many parents have found this funding source invaluable for protecting their child’s financial health while funding their education.
Conclusion
Parent student loans offer parents the opportunity to invest in their child’s education and future success. By providing financial support, parents can help their children pursue their educational aspirations and set a strong foundation for their professional journey.
Responsible borrowing, thoughtful financial planning, and open communication between parents and students are key to ensuring that parent student loans contribute positively to the educational experience without causing undue financial strain.