Parents—Stop Borrowing for College
Parents want their children to attend the college of their dreams. Country Financial reports that 56% of parents are willing to go into debt to pay tuition.
Before you cosign on your child’s loan, consider these points:
- 5.2 million or 12.5% of adults in their 50s have student loan debt.
- 2.8 million or 5.3% of adults aged 60 and older have a student loan debt balance. (educationdata.org)
Loans can affect your finances for life.
Many parents risk their own financial health with burdensome student loan debt: private debt or Parent PLUS loans, which cannot be transferred to the student. Last year, one-fourth of federal loan dollars for undergraduate education went to those paying for a child/grandchild through the Parent PLUS loan program, with an average loan of $16,305, nearly triple the maximum amount that students can borrow for themselves in a year. Nearly one in three parents with PLUS loans struggled making a payment over five years; one in nine were in default.
The amount your child receives is less than you borrow.
Loans carry origination fees. Federal PLUS loans for parents for July 2021-22 have loan fees of 4.228%. So a $10,000 loan only provides $9,577.20 to your student.
The amount you owe continues to grow.
Loans accrue interest. Federal PLUS loans for parents for July 2021-22 have a fixed interest rate of 6.28%. Unpaid interest accrues daily. To retire the $10,000 loan after the first year, you would pay $10,628.
You are liable for the debt.
A Parent PLUS loan or private loan is your responsibility. If you cosign a loan, the debt is your responsibility. If your student fails to make payments, or makes late payments, your credit score is affected, not just theirs. Loan repayment may take a decade or more after graduation. If circumstances shift due to job loss or health, your finances may be affected into retirement.
Parent PLUS loans are NOT the answer for financing your child’s education.
Compared to student loans, Parent PLUS loans have higher interest rates and fees and fewer options for repayment. Parent Plus loans are tempting because they have no borrowing cap (other than cost of attendance minus other financial aid). Just because you can borrow that much money doesn’t mean you should.
Learn about federal student loan programs available to your student. Federal loans are generally cheaper than private loans with greater protections in case of financial hardship and more options for forgiveness.
Don’t jeopardize your financial well-being. OnToCollege urges you to ask your student to contribute at least $3,000 annually from personal earnings and borrow no more than $5,500/year in their own name—in direct Stafford loans at 3.73% or Perkins Loans at 5%. Families with less than $160,000 in pre-tax income may also qualify for the $2,500/year American Opportunity Tax Credit.
Student annual contribution:
$3,000 + $5,500 + $2,500 = $11K Paves the Way.
If the cost still remains too high, even after your student contributes $11K each year, he or she can always find a lower cost college. Be sure a few that fit the family budget are on his or her final college list.
So parents—Stop borrowing for college.
College can be transformative. But don’t jeopardize your own standard of living and/or retirement. $11K Paves the Way.