Should parents or students borrow to pay for college?

Given the current malaise in the credit markets, it should come as no surprise that the student loan system is under heightened duress. Many lenders have stopped making new loans to students; others are tightening their bootstraps and making it more difficult, and more expensive, for borrowers — both students and parents.

Federal Student Loans — Your First Stop

Whether the student or the parent does the borrowing, your first and best option for securing a loan is to go directly to the federal government. Stafford loans, designed for students, and PLUS loans, for parents, are the most commonly used federal loans. The key benefits of Stafford loans include:

Low, fixed-interest rates
Income-based eligibility (indicated by data filed on the FAFSA, Free Application for Federal Student Aid)
Repayment deferral until after graduation

On the downside, Stafford loans carry annual borrowing limits that often are not high enough to cover a year of college costs.

Parents who intend to fill their child’s college funding gap via a PLUS loan must undergo a credit check in order to qualify. Those who are deemed creditworthy can borrow up to the full cost of attending college — including the cost of room and board and books.

While Stafford loans offer a low fixed rate of interest, the interest on a PLUS loan is variable and may change annually. In addition, unlike student loans that allow borrowers to defer repayment until after graduation, PLUS loans require parents to begin a repayment schedule immediately.

For students and parents alike, borrowing through the federal education loan program—as well as through private loan issuers—offers tax deductions on interest paid.

It’’s For the Long Haul

Paying for college is a long-term commitment. Determining who should pay and how to cover the costs is a personal family decision that should take into consideration a family’s current financial needs as well as its short- and longer-term financial goals.

Online Resources

There is a wealth of information available online to help research the financial aid and federal student loan options available to families. The following are just a few to get you started.