It’s no secret that paying for college and graduate school can be expensive. Along with purchasing a home, receiving a degree or two from a higher education institution can be one of the most costly (yet rewarding) financial steps of a person’s life. For most traditional college students, this decision is made at an age where the magnitude of the financial implications is too abstract to grasp. Many students begin college around 18 years old, and with Forbes’ estimated average yearly tuition cost of $43,500 per year, funding often requires assistance in the form of student loans. Some students take out loans in their own names to pay back after graduation, but since annual loan limits in the federal program have not increased proportionately with rising tuition rates at many four-year colleges, parents often choose to help their children fill the financial aid gap with loans designed especially to supplement additional education costs. Parent PLUS loans or cosigning a loan are the top two options for parents looking to help fund a child’s college education — but what is the difference, and which is right for you?
Cosigning a Loan
Cosigning a loan makes both the parent and the child mutually responsible for repayment. While a student does not need a cosigner to qualify for most federal loans, having a parent cosigner increases the chances of being approved for private loans needed to meet the total cost of attendance. The parent is not solely responsible for the loan, but if the child defaults or fails to make timely payments, the parents are required to take responsibility or risk damaging their credit score. Some experts caution parents against cosigning student loans, but in some cases it may be necessary in order for the child to be approved by private lenders.
Parent PLUS Loans
A Parent PLUS Loan is simply a federal education loan taken out by parents to help pay for their child’s tuition. What makes it different from other student loans is that the parent assumes complete financial responsibility for the loan. In other words, if the payments are not made on time, it affects the credit score of the parent. While some parents may be eager to help foot the bill for their child’s education, it is recommended to take advantage of Direct Loans first before taking out a Parent PLUS Loan. PLUS loans typically involve higher interest rates and fees than Direct Loans, and there is no grace period — the repayment process begins as soon as the final disbursement is made. Parent PLUS Loans are available to the parents of dependent undergraduate students and offer one way to curtail the amount of debt that the child accumulates.
Which is the Right Move?
If you are a parent considering ways to help your child pay for college, it is crucial to understand the differences and financial implications of both options. Both Parent PLUS Loans and cosigning a loan carry varying degrees of financial risk, and both are options for parents who want to make sure their child is not taking on too much debt. However, remember that parents can always help pay for lower-cost loans that are solely in their child’s name, which may save everyone money. Ultimately, it is a personal choice that depends on the financial situation and preferences of the family.
Are you a parent who financially supported your child’s education through a Parent PLUS Loan? See what options are available for refinancing your loans into flexible repayment plans and competitive interest rates that could lower your monthly payments or total cost of the loan.