While most federal student loans don’t require a credit check, there are still scenarios where students need good credit to borrow money. After all, private student loans do require a credit check and are usually only available to borrowers with good or excellent credit scores. In addition, some government-backed loans, such as Direct PLUS, require a credit check that limits their uses.
With this in mind, it’s not uncommon for parents to help fund the college – either as a co-signer of a private student loan, or as a borrower for a Parent PLUS loan, or even as a private parent loan. A recent survey of College Ave student loans among college parents by Barnes & Noble College Insights found that 42% plan to use student loans to fund college and 18% plan to use parent loans.
But which option makes the most sense for parents who want to help their relatives go through college? Both options have many advantages and disadvantages as well as many pitfalls to watch out for.
Cosigning student loans – advantages and disadvantages
Parents who are considering becoming co-signers of a private student loan should think long and hard about this decision. As a co-signer, you are jointly responsible for the repayment of the student loan. This means that your creditworthiness can ultimately be affected if the borrower makes late payments or defaults on their loans. But it also means that you are jointly responsible for repaying all of the loans, no matter what – even if your child chooses not to pay the loans as a whole.
The benefits of being a co-signer versus taking a Parent PLUS loan can be slightly different, but can include:
- You share the shared responsibility for student loan debt with your student as compared to Parent PLUS loans, where you are solely responsible for repayment.
- Private student loans that require a co-signer may have lower interest rates than Parent PLUS loans.
- Some private student loans have co-signing programs that allow the borrower to approve you as a co-signer after certain conditions are met.
The disadvantages of co-signing student loans are obvious and can include:
- Your creditworthiness can suffer if your child pays his bills late or delays his or her loans.
- You will have to repay the student loan if your relative does not.
Parent PLUS loan – advantages and disadvantages
Parent PLUS loans are federal student loans that are taken up by parents to finance the training of a relative. To qualify, at least half of you must be a biological or adoptive parent at a dependent school and be able to pass a credit check.
The fixed interest rate for parent PLUS loans is currently 7.08%. This type of loan allows you to borrow up to the cost of participation minus any financial support your child receives.
These loans also come with an upfront loan fee that is taken out of each payout as a percentage of the loan amount. The current loan fee is 4.236%.
Advantages of parent PLUS loans can include:
- You can qualify for a fixed interest rate of 7.08%, and the credit limits are generous and correspond to the cost of tuition fees minus other grants.
- You can repay parent PLUS loans over a period of 10 to 25 years.
The disadvantages of parent PLUS loans are also obvious and can include:
- You are solely responsible for repaying these loans and can never transfer responsibility to your loved ones.
- The loan fees increase the long-term cost of the parent PLUS loan.
- These loans have no grace period. You can apply for a deferral while your child is enrolled for at least half and for another six months after your child has finished school, leaves school, or falls below enrollment at half-time. During this time, however, interest continues to accrue.
Personal loans for parents – advantages and disadvantages
You should also know that you can take out private parental loans to help your child pay for college. With a private parent loan, you can borrow money from a bank or private student loan company to pay tuition and tuition fees, and it may even be possible that some of the loan funds will be sent directly to you so that you can control spending on books and books other college supplies. There is also potential for savings over federal loan options for parents if the loan company does not charge origination or application fees. College Ave private parent loans allow you to repay your loan over a 5-15 year period and choose between several repayment options, including interest-free payments, as needed.
Advantages of private parent loans:
- You can use your excellent credit rating to qualify for a lower interest rate
- Choose between flexible repayment plans
- Save origination and registration fees
Disadvantages of private parent loans:
- You borrow the money for school and are solely responsible for the repayment
- With private student loans, you are generally not entitled to a grace period
Other factors that parents should consider
Parents should know that both private and state student loans can offer tax benefits, including Parent PLUS loans. This is because both private and state student loans pave the way for deducting a certain amount of the interest paid on your taxes. You can currently claim up to $ 2,500 per student per year for the first four years of higher education with the American Opportunity Credit.
Parents should also consider repayment plans and monthly payments. If you can repay parent PLUS loans for 10 to 25 years, different conditions apply to private student and parent loans, which can vary from lender to lender.
For example, College Ave allows you to repay student and graduate student loans over a period of 5 years, 8 years, 10 years, or 15 years. A shorter repayment period can help you get out of debt much faster and save money on interest. During this time, however, you will receive a higher monthly payment.  [JG2]
Which option works better? Only you can decide
Given all of these details, it’s easy to see how one of the two options involves some risk. When you become a co-signer of a student loan, you find yourself in a situation where your financial health depends on whether your relatives are responsible for your loan. For parent PLUS loans and private parent loans, however, you have to be solely responsible for the repayment that may or may not make sense depending on how much support you wanted to provide.
Before thinking about student loans, make sure that you and your loved ones have examined all sources of funding, including those where you, as a parent, do not need to make any repayment at all.
For example, has your student researched enough scholarships? If you are still unable to cover your college expenses, it almost always makes sense to grant federal loans on behalf of the student that do not require a credit check or co-signer. This is because federal student loans are linked to low fixed interest rates and federal protective measures such as deferral, forbearance, and income-based repayment plans.
Ideally, your child will borrow what it needs first through state-backed student loans and then rely only on you to fill the gaps. At this point, you can decide whether you want to rely on student loans for parents or become a co-signer of a private student loan that may be offered on better terms and conditions.
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