At least 20% of college students need some type of loan to help pay for their college education. Such a statistic can lead to students graduating with an unmanageable debt load. An alternative is for parents to help out by taking out loans themselves. But which is the better option – student loans or parent loans? Each has distinct advantages and uses.
Federal student loans
Federal student loans have the lowest interest rates and best repayment options. If you need to take out loans and you qualify for federal loans, this is your best choice. Just be sure to accept only the funds you need, even if you are offered much more. Parents can always help their children pay off these loans once repayment begins after graduation.
Federal parent loans
PLUS Loans (Parent Loan for Undergraduate Students) are another loan option that comes with low interest rates. If you are a parent with dependent students attending college at least part-time and you have a good credit history, you are eligible to receive a PLUS Loan. These loans are not needs-based. You can borrow up to the total cost of undergraduate education expenses, minus other financial aid already received. Unlike federal student loans, payment is not deferred until after graduation; instead, your first loan payment will be due about 60 days after the loan is disbursed. Also unlike federal student loans, PLUS Loans require an application fee.
Both students and parents can take out private loans to cover funding gaps. Terms are basically the same for these loans, although students may be able to have their repayment deferred until after graduation. Another consideration is that students may wish to take out small loans to begin to establish a credit history. You may need to cosign for private student loans.
Parents do have some additional options for college funding, such as home equity loans. These often have rates as good as private loans.
So which type of loan should I get?
This really comes down to a personal decision. Ask yourself these questions as you are trying to decide:
– What level of debt do you feel is manageable for your child to graduate with?
– How important is it to you that your child takes responsibility for paying student loans?
– Will you and your child work out a repayment plan to repay PLUS Loans and other parent loans?
Lenders may offer deferments for up to three years for federal loans and one