Congratulations parents! Your son or daughter is headed off to college or graduate school. This is the moment you have probably been planning (or dreading) for years: Paying for their education.
In the ideal scenario, his or her education can be funded either through your savings and/or scholarships. But borrowing money may also need to be part of the financial equation for students and parents alike.
College students themselves may be eligible to borrow both federal and private loans under their own name, or with a cosigner. Parents can also borrow and there are both federal and private loans available just for them. Below, we’ll focus only on the loans available for parents.
Read more How Much Does College Cost?
Complete the FAFSA
No matter what your financial situation, the first step for parents and college-bound students is completing the FAFSA, or the Free Application for Student Aid.
Graduate school students are typically considered independent students and do not need parents’ information to complete the FAFSA.
This form will ask for your family finances to determine how much your child (who is considered a dependent as an undergraduate) is eligible to receive in financial aid and borrow based on the school’s cost of attendance.
You also may be eligible to borrow through the federal government’s Parent PLUS program. However, do not automatically assume these federal loans are the best borrowing option for parents.
Parent PLUS Loans Not Always Best Option
Unlike the Stafford loans that are offered to students which have no credit check and the lowest rates offered by the government, Parents PLUS loans are among the priciest federal student loans and do require a minimal credit check. Not only are the interest rates higher than Stafford loans, they also have a kind of hidden cost—every PLUS loan has a hefty origination fee.
As of July 2016, a Parent PLUS loan had a current interest rate of 6.31% with an origination fee of 4.276%. That means the PLUS loan’s APR is 7.25%—nearly a full percentage point over the interest rate.
There’s another key difference between parent loans and students’ loans: Parents who use PLUS federal loans are expected to start paying once the loan is disbursed. However, parents can request a deferment while their child is in school—and repayment would start six months after graduation, for example.
You can get more details on the Parent PLUS loan program with the Federal Student Aid website.
The one benefit that Parent PLUS loans do have in common with other student loans is that they are eligible for one of the government’s income-based repayment programs. However, even that benefit is limited for parents. Qualified Parent PLUS loans are only eligible for the income-contingent repayment, which caps payments at 20% of income with forgiveness after 25 years.
While these PLUS loans might be bundled up into an award letter from a school’s financial aid offer, parents should consider all their options first. As always, it pays to shop around and find the best fit for each family.
Private Parent Loans May Have Better Rates
Private loans may be a good alternative for parents who are looking to borrow for their student’s education. These can be used to pay for both undergraduate and graduate education.
With private loans, the applicant’s rate will be based on their financial profile—which may mean those with a great credit history may get rates that are better than the government’s Parent PLUS loans. Private student loans for parents typically have fixed rates starting at around 5.75% and variable rates started at around 4.00%. Rates will vary from lender to lender.
The great cost savings, however, is in the fees. Many newer private student loan lenders do not have origination fees. Some lenders may also allow borrowers other than the immediate parents to borrow (e.g. extended family). Lastly, borrowers typically have a choice between fixed or variable-rate loans with private loans.
Loans are just one piece of the discussion you’re likely having around how you and your son or daughter will pay for college.
If they have their own student loans or you have existing Parent PLUS loans, remember that refinancing can be a smart move to reduce interest or change the term so that the monthly payment better matches their monthly budget.