With the ever-increasing cost of earning a college degree, students – and their parents – are borrowing student loans to cover higher education. Student loans represent an astonishing $1.4 trillion in outstanding debt.
An estimated $84 billion is comprised of federal loans taken on by parents, and an additional several billion in private student loans held by parents.
Parents are taking out private student loans for their kids. Why? Despite having more benefits, federal parent loans have a borrowing limit, and the rising cost of college may exceed that limit in some cases.
According to Sallie Mae, parents take on student loan debt nearly 35 percent of the time to help manage the tuition gap and leave their children with less of a financial burden upon graduation. It may seem commonplace to take out a loan as a parent, but there are things to consider before signing on the dotted line for a private student loan for a child.
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Types of Private Student Loans for Parents
Private student loans for parents are offered by various lenders in the student loan space. The most prominent private parent student loans include options from Sallie Mae, Citizens Bank, and PNC. Here is a brief overview of the ins and outs of each.
Sallie Mae is one of the largest providers of private student loans, and in 2016, it began offering parents options for helping finance students’ education objectives. Private parent student loans from Sallie Mae come with variable or fixed interest rates, ranging from 5.37 to 11.74 percent for variable rates and 5.74 to 12.87 percent for fixed rates.
Parents have the option to select an interest-only repayment plan which requires only interest payments for the first 48 months and full principal and interest after that term. Repayment may also be structured as principal and interest payments from the start of the loan. Private parent student loans from Sallie Mae can be as small as $1,000 and up to the certified cost of attendance for the student.
Parents also have an option for borrowing with Citizens Bank, which offers private student loans to parents with strong credit and income. Private parent student loans from Citizens Bank come with only fixed interest rates, starting as low as 6.64 percent for the shortest available repayment term (5 years).
Parents have the opportunity to choose an interest-only repayment plan that requires interest payments while the student is attending school at least half-time. Alternatively, a full principal and interest repayment plan may be selected. Repayment terms are either 5 or 10 years, and loan amounts range from $1,000 up to $90,000 for undergraduate students, $110,000 for graduate students, $180,000 for business and law students, and $150,000 or $295,000 for healthcare professional students.
Wells Fargo also offers private parent student loans with either variable or fixed interest rates. Variable rates range from 5.49 to 11.99 percent, and fixed rates range from 6.49 to 12.99 percent. Parent borrowers can opt for interest-only payments for up to 48 months, followed by principal and interest payments, or immediate principal and interest payments. With Wells Fargo, parents can borrow up to $25,000 per school year, with a lifetime limit of $100,000.
How Much Do You Really Need to Borrow?
Private student loans for parents with children in school can be costly, making it necessary to understand the affordability of such loans before taking them on.
To determine how much you really need to borrow for a child’s education expenses, start with the Free Application for Federal Student Aid (FAFSA). Completing the FAFSA provides a broad overview of the total cost of college each year, what financial aid in the form of grants and scholarships may be available, and the amount remaining to be covered by private parent student loans.
It is also critical to recognize your ability to repay the student loans before accepting funds. Each private lender requires immediate repayment for parent loans, whether they are interest-only or full principal and interest payments. Parents should take the time to evaluate their financial ability based on budget and cash flow to see whether a private parent student loan is affordable from the start.
Applying and Getting Approved
Private parent student loans require strong credit history and score, along with verifiable income at the time an application is submitted. Parents need to have a solid track record of on-time payments with other creditors, few to no black marks on their credit report, and steady employment to qualify. Parents with less than ideal credit likely will not be eligible for a private student loan for their student, and at best, they’ll be eligible for a loan with higher rates.
The application process for a private parent student loan is relatively simple, as most lenders offer an online option that takes only a few moments to complete. However, some documentation may be required along the way. Details about employment and income, like a paystub or previous year’s tax return, other assets on hand, like checking and savings account statements, and proof of identification may all be required when taking out a private parent student loan.
Private Student Loan Traps for Parents
While private parent student loans are one strategy for financing a child’s education, there are some downsides that parents need to be aware.
First, repayment begins immediately for parent student loans. This can put a damper on cash flow each month, and for those who borrow a significant amount, the payments may be substantial.
Also, parents who take on private student loans for their children may not be able to fully contribute toward other financial goals, like saving for retirement or paying off other debts like credit cards or mortgage balances.
Finally, parents are on the hook for private parent student loans – not the child – which means that a financial hardship in the future can seriously derail financial stability.
Should You Get a Private or Federal Parent Loan?
In addition to private parent student loans, borrowers may also consider their ability to secure federal parent loans for a child. With a PLUS loan from the Department of Education, parents may qualify based on a simple credit check, not necessarily their ability to repay the loan in the future. The interest rate on a federal parent student loan is fixed. The benefit of a parent PLUS loan is that it can be easier to apply and get approved; however, this comes with the risk of borrowing too much.
Parents may consider private parent student loans as an alternative to federal parent loans, primarily when a lower interest rate can be secured based on strong credit history and steady income. In either case, parents need to do an in-depth review of their ability to repay the loan prior to taking on debt to fund their child’s education.
Author: Melissa Horton
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