Welcome to Edmit’s guide for parents borrowing student loans. In this guide, we’re going to discuss everything from how much you can afford to borrow for your student’s education to helping them figure out how to fill last-minute funding gaps with scholarships and loans in their name.
If you’re a parent of an incoming first-year college student, you may feel it’s too late for the ‘how much to borrow’ question. It isn’t. For this year, we’re going to talk about the smartest and cheapest ways to borrow, how to get additional free money, and how to cut costs.
For the future, we’ll talk about how much is smart to borrow as a whole. That decision may involve looking for more scholarships or transferring schools after the first year if the school just isn’t affordable long term.
While this is a guide to borrowing student loans for parents, it’s also a guide for talking about your overall strategy for paying for college. At the end of this guide, you’ll be able to fill in a discussion sheet that will help you organize your thoughts for chatting with your student about the paying for college process.
Before you figure out how much you and your student needs to borrow, earn, or pay, you need to figure out how much the cost will be after free money from the school and government.
Use the cost of attendance amount the school gave you as the starting number. Then, subtract grants and scholarships.
*Note: If the cost of attendance seems depressing, don’t worry too much. We’ll tell you how to cut it down with easy, painless ways to cut college costs later in this guide. You’ll also learn about ways to get the lowest interest rates and monthly payments on your loans.
Private scholarships can also be deducted, depending on how the school evaluates them within your financial aid award. For instance, some schools deduct private scholarships from the amount of free money your student receives from them. Others reduce the amount of student loans received or from the expected family contribution. Your student should call the school financial aid office to see how they’ll handle your private scholarships. This is a good time to ask about any scholarship money that might still be available, too. This can be your time to swoop in and get some extra cash.
As far as work study goes, until your student has a job, it’s not guaranteed. Don’t subtract work income from the cost of attendance. Use work income to reduce living costs during the student’s college year or to reduce next year’s costs.
Simplified calculation: College Funding Gap = Cost of Attendance - Scholarships + Grants.
Jot down the number. It will be your starting point for a discussion about borrowing and college funding gap fillers.
Parent checklist for calculating the funding gap:
If you haven’t done so already, fill out the Free Application for Federal Student Aid (FAFSA) with your student. The online form is the first step for applying for student loans AND lets the school and the government know you’d like money for your child to pay for college. The money the school or the government offers comes in the form of student loans, grants and scholarships.
Filling out the form this close to beginning your fall semester doesn’t hurt your student’s or your ability to qualify for federal student loans. Federal Pell grants can also still be awarded.
The only drawback to filling out the form this late is your student may not get university grants that were already awarded to other students on a first-come-first-served basis. But they will have access to university grants and scholarships not yet awarded.
As a parent, you don’t want your child to be deeply in debt after college, but you also don’t want to harm your own retirement and life goals. We will talk about your borrowing in the next section. First, we should talk about what you need to know about your child’s student loans and how much is reasonable for them to borrow.
We’re going to talk about borrowing both federal and private loans in the student’s name. The reason we are talking about both types of loans in the same section is they should try not to borrow more than one year’s post graduation starting salary in total. They can research potential salaries on Edmit, Payscale, or through the college career office. If starting salaries could be about $40,000, your student knows they probably shouldn’t borrow an average of more than $10,000 per year.
Note: If their average borrowing is more than $10,000 per year, you may want to consider transferring colleges next year. You can use the Edmit college search tool to find one that may offer grants and scholarships to you.
Borrow federal student loans in your student’s name first
You should accept federal student loans issued directly to the student first. These loans have easy repayment terms, low interest rates, easy approval terms, and affordable loan limits.
Dependent students can borrow up to $5,500 in their first year if you qualify for federal student loans called Parent PLUS loans. If you don’t, the student can borrow a total of $9,500 in federal student loans – almost the full annual amount they should borrow if the starting salary is expected to be $40,000 after graduation.
Within the borrowing limits are subsidized and unsubsidized loans. If you qualify for subsidized loans, the student should borrow them.
The main perk of these loans is that interest isn’t charged while your child is at least a half-time college student in college and in a few other circumstances. For instance, they may not be charged interest when they are on a complete break from payments.
Students also may qualify for interest forgiveness if their income-based monthly payment is less than the total subsidized interest charged. For example, if their income-driven payment this year is $25 per month but the interest that accrues each month is $50 in subsidized loans, the government will pay the other $25 of interest until their income rises - for up to three years.
The maximum limit for subsidized student loans during their first year in school is $3,500. These loans are based to some extent on financial need. Thus, your student may or may not get approved for this type of loan. They also may get approved for a reduced amount.
The interest rate for both subsidized and unsubsidized loans for the 2018 / 2019 school year was 5.05 percent.
Your student should accept unsubsidized loans before all private and Parent PLUS loans. Unsubsidized loans are similar to subsidized loans in that they have the same, low interest rate, flexible repayment options, and guaranteed payment breaks when needed. The difference is that interest adds up while in school.
How it works when students borrow private loans in their name
If students have a gap to fill after student loans issued to your student are exhausted, private student loans may be your next best option. Depending on your credit score, these loans may be much cheaper to borrow than parent PLUS loans from the government. For instance, PLUS loans issued for the 2018 / 2019 academic year had a 7.6 percent interest rate, while a student with a parent with good credit could have gotten an interest rate of less than 4.5 percent for a private loan.
Why does your credit score matter in a loan issued to your student? Because private student loans have similar standards for loan approvals as other bank loans do. Your student likely doesn’t have an established pattern of good credit and enough income to pay off the loan yet. Thus, if you agree to cosign, meaning you’ll pay off the loan if they don’t, they can get private student loan funding.
It’s very important that your student only borrow based on what they can realistically afford to pay back. If more money is needed, discuss borrowing additional funds in your name. We’ll also talk about other ways to save money beyond borrowing at the tail end of this guide.
Parent checklist: Helping your student with their student loan borrowing process
At this point, you know the amount your student can borrow. Now, if you still need more, you have to figure out how much you can afford to borrow, and the best strategic loan options.
Don’t worry if the amount doesn’t cover all college expenses. We’re going to go over your federal and private student loan options. Then, we’ll show you how to get the lowest interest rates. You’ll also learn ways to fill gaps beyond student loans in the next section.
First, how much you should borrow as a parent is a little more complicated than deciding what your student can borrow. You potentially have expenses tied to sending your other kids to college, your own debt, and your retirement. One guideline is to look at your own budget and see if you do have room for payments after your own savings and retirement are taken care of. When you calculate loan payments using either the federal Repayment Estimator or Edmit’s private student loan calculator to plug in numbers to see what that monthly number adds up to for overall borrowing. For example, a $60,000 Plus loan consolidated for a 25-year period has a monthly payment of $200 per month.
If you can’t afford the annual cost of the college after evaluating loan options, your family may have to look at your student transferring to a less expensive college as early as the next semester or postponing college for a semester. If you are unsure what you can afford, you should speak with your financial planner or a credit and budgeting counselor at a local credit union.
Next, let’s look at your borrowing options.
If you have good credit, private student loans for parents are generally the better deal. Parent PLUS loans for the 2018 / 2019 school year were issued at a rate of 7.6 percent, while private student loans for parents were issued at a rate of 6 percent.
Parent PLUS loans, issued by the federal government, also have origination fees, a charge to borrow the loan from the second the loan is issued. A 4 percent origination fee adds $800 to a $20,000 loan, even if you paid back the loan the same day.
If private student loans to parents are so much less expensive, why would anyone borrow parent PLUS loans from the federal government?
Despite higher borrowing cost, there are still several advantages to federal PLUS loans:
Parent PLUS loans are easier to get approved than private loans
The main perk of Parent PLUS loans is you don’t need great credit to get approved. The government spells out minimal standards for adverse history that could cause denial, such as debt on your credit report with an outstanding balance of $2,085 that is 90 days or more delinquent as of the date of the credit report.
The loan amount approved isn’t based on income.
You can borrow as much as you need. However, you need to think carefully about whether you can pay it back. It may not be wise to borrow $120,000 over the course of 4 years if your family income is $60,000.
Parent Plus loans have income-driven options, too.
Students generally have more options for repayment than parents do. However, there is one option for income-driven repayment that parents do have: income-contingent payments. To qualify, parents have to consolidate Parent PLUS loans when they finish borrowing. You may have your own student loans already from your own education. Keeps these loans separate.
Note: When using the repayment estimator for parent PLUS loans, calculate them as a Direct loan so the income-contingent payment pops up. Also, calculate your parent PLUS loans and your student’s loans separately as they have additional repayment options that you don’t. Your loans for your own education have additional options as well.
Private parent student loans can have a higher monthly payment, even though they have a lower interest rate.
A private student parent loan with a 10-year repayment term at 6 percent would have a payment of about $670.00. While you pay less interest, you may not be able to afford an extra $470 versus a Parent PLUS loan.
Checklist for borrowing student loans in your name: