We’ve compiled a list of the questions we most often receive about parent loans for college. If you don’t see your question below, we know how to answer that one, too! Just write to us at firstname.lastname@example.org!
What’s the difference between a student loan and a parent loan?
The difference between a student loan and a parent loan is the identity of the primary borrower. A parent loan lets a parent pay for their child to attend school, whereas a student is borrowing for their own education with a student loan. To complicate things more, parents are sometimes co-signers on student loans, meaning both parties are equally responsible for paying back the debt to the lender!
Whether you are borrowing a student or parent loan, you can choose your lender, since both the federal government and private lenders fund both parent and student loans. Just remember to compare rates and fees before signing for any option. Federal PLUS Loan rates were set this May and are fixed at 7.0% for the 2017/18 academic year and have a 4.276% origination fee. At this point, most private loan programs have already established rates for the 2017/18 academic year, and for comparison's sake, RISLA's fixed rates range from 4.49% -6.74%. All of RISLA's loan programs offer the additional benefit of zero upfront fees for the 2017/18 academic year.
Student loans from the federal government are in just the student's name. However, if you need some additional funds from a state-based or private lender after exhausting the federal student loan amounts, the student most often will need a cosigner, which is typically a parent, or a parent can borrow on their own for their child's education. Learn more about cosigner responsibilities here.
Are there any risks?
Yes, as with any loan there are risks. The worst-case scenario is default, which occurs when you’re delinquent in your loan repayment. Many continuous months of delinquency can result in default. Defaulting is a legal status that has serious long-term effects on credit and other potential legal implications as well. But default is a worst-case scenario and the vast majority of borrowers never reach this point, because college loans have a lot more flexibility than your average car loan or mortgage. The more typical risks and concerns for parent only education loans include:
- Lack of repayment options compared to student loans, which can mean inflexibility if money becomes tight during repayment. Federal PLUS loans (more on those below) don’t include all of the excellent repayment options that come with Federal Direct Subsidized and Unsubsidized Loans. Keep this in mind when borrowing.
- If you’re borrowing as a parent because your student's award has been maxed out, be careful about the total debt assumed between you and your student. Education debts should be weighed carefully to ensure that the payoff after graduation will be real. Remember that if you’re paying off loans, your budget is more restricted, and that repayment will happen concurrent to your student’s repayment. If you are able to, start payments right away and don't delay until graduation. Choosing this kind of option is likely to result in a lower interest rate.
- You won’t be able to transfer the debt to the student, even after graduation, unless you qualify for co-signer release (not available on all programs) or if you refinance (and even then, you may need to cosign on that loan). That means that your name is most-likely attached to the loan for the full duration of repayment. It’s a significant commitment. If you cosigned a loan for your student, you may be able to get released after a certain number of on-time payments but you must meet the specific qualifications of your lender.
- You’ll need a decent credit history in order to qualify for a PLUS loan and a strong history of good credit or for a parent loan from a private lender.
Which type of parent loan should we choose?
There are two primary categories of parent loans: Federal PLUS loans and private loans.
Federal PLUS loans are offered to parents through the Department of Education’s federal education loan program, and are sometimes awarded using the FAFSA along with the rest of your student’s federal aid package.
- PLUS loans have fixed interest rates that are significantly higher than federal student loan interest rates (7.0% for 2017/18 for federal parent loans vs. 4.45% for federal student loans for undergrads).
- PLUS loans also include an origination fee, (currently 4.276%) that is taken out prior to the loan’s disbursement.
Private lenders offer a good opportunity to obtain a competitive loan product with often-times lower interest rates and potentially with no origination fee (check out RISLA's College Loan programs). Credit will still be a significant factor here, but if you have strong credit you’ll want to check with private lenders before obtaining a parent loan. Depending on your state, private lenders may be either non-profit organizations working in a partnership with state government, or they may be private banks. And remember, if you want your student to be on the hook, opt for a student loan with you as the cosigner.
If you’re considering borrowing to finance your child’s education, know exactly what you’re borrowing! Both federal PLUS loans and private education loans offer an excellent opportunity to invest in your student’s future – just know what you’re borrowing, why you’re borrowing, and carefully weigh the potential risks and rewards before signing on the dotted line.