For many people, getting into college is a dream come true. And for many parents, that means doing anything to turn that dream into a reality for their children, including taking on debt to cover the cost of college.
But no matter how much they may want to help their children, parents must consider what borrowing or co-signing loans will mean to them—now and as they get older. This can be tough to do with an emotional decision like choosing a school. However, by knowing the following, you'll understand just what you're getting into.
The Loans Will Be In Your Name
Many families handle borrowing the same way: the parent takes out the Parent PLUS loan, and the child repays it when he or she graduates and begins working. This strategy may work for you, but it doesn't actually shift the responsibility for repayment. If you're the parent, the loan remains in your name, keeping you legally on the hook for it.
Any loans in your name remain in your name for the entire life of the loan. This is especially important if you are nearing retirement. As you begin to live on a fixed income, your ability to repay may diminish. You need to factor the payments into your budget—even if your son or daughter plans to handle repayment.
Unfortunately, plans can change. Your child (although we're sure they're perfect) may neglect these payments or be unable to make them. In such situations, your credit standing will be damaged, not theirs. Plus, as the borrower, you'll be on the hook for making those payments, as well as covering any fees that come up.
Co-signing Is The Same As Borrowing
Instead of taking out federal Parent PLUS loans in their name, parents may opt to co-sign private student loans in their child's name. However, from a responsibility standpoint, this is pretty much the same thing as if you'd borrowed the loan yourself.
If your child neglects or cannot make the payments, you will be responsible for them—just like you had borrowed the loans yourself. That's because a co-signer shares equal responsibility for the debt as the borrower. Because of this, you'll want to avoid co-signing on more debt than you can repay (again, consider your income post-retirement when calculating this).
In addition, unlike federal loans, many private loans do not provide relief if the borrower becomes disabled or passes away. If these things happen, the co-signer often must still repay the loan. Because of this, it is strongly recommended that the borrower take out life insurance in an amount that would pay the loans if the worst should occur.
Plan Your Retirement Budget
To estimate the amount that you will receive in Social Security benefits during retirement, use the Social Security Administration Retirement Estimator. If you have retirement accounts like an IRA or a 401(k), you may be able to estimate your budget with these accounts as well by contacting your account administrator.
You can estimate what your payments would be under the various repayment options for federal student loans here. It may be helpful to factor in what your payments would look like compared to your retirement budget before you take on the student loan debt in your name.
Also, know that federal loan holders can garnish your Social Security income (as well as your wages, if you are working) if a loan in your name or that you co-signed for defaults. This may further limit your income.
Find Other Ways To Pay
Very few students and their families can pay the term balance off out of pocket. So, once the bill arrives from your child's school, you may immediately turn to student loans to cover that tuition gap.
However, you will usually have 4 to 6 weeks to get a payment in place without incurring any late fees or other administrative hiccups. That means you have time to consider other options before you borrow. Here are a couple:
- Payment plans: These plans allow you to repay all or a portion of your child's balance over the course of their academic year or term (typically 5 or 10 months). These plans are usually interest free, but typically charge a minimal annual enrollment fee. This option may be smart for you if you know you can afford to pay a certain amount per month while your child is attending or if your child can pay a certain amount per month. This would limit the interest that you would otherwise accrue if you borrowed the entire amount with a student loan.
- Scholarships: Of course, finding free money is an option as well. Make sure that your child is still diligently searching for scholarships. This can bring the balance down to a more manageable level—or zero!