While most federal student loans don’t require a credit check, there are still scenarios where students need good credit to borrow money. After all, private student loans do require a credit check and are typically only available to borrowers with good or excellent credit scores. Not only that, but some government-backed loans like Direct PLUS loans do require a credit check, which limits who can use them.
With that in mind, it’s not uncommon for parents to get involved in financing college — either as a cosigner on a private student loan or a borrower for a Parent PLUS loan or even a private parent loan. A recent College Ave Student Loans survey of college parents conducted by Barnes & Noble College Insights found that 42% plan to tap student loans to help pay for college and 18% plan to use parent loans.
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But which option makes the most sense for parents who want to help their dependents get through college? There are lots of pros and cons to consider with either option, as well as plenty of pitfalls to watch out for.
Cosigning Student Loans — Pros and Cons
Parents considering becoming a cosigner on a private student loan should think long and hard about this decision. As a cosigner, you are jointly responsible for repayment of the student loan. This means that, if the borrower makes late payments or defaults on their loans, your credit score could ultimately take a hit.
But it also means that you’re jointly responsible for paying off the loans in their entirety no matter what happens — even if your child decides to stop paying on their loans altogether.
The advantages of becoming a cosigner versus taking out a Parent PLUS Loan can be slightly nuanced, but they may include:
- You are sharing the joint responsibility of the student loan debt with your student, versus Parent PLUS Loans that make you solely responsible for repayment.
- Private student loans that require a cosigner can come with lower interest rates than Parent PLUS Loans.
- Some private student loans have “cosigner release” programs that let the borrower release you as a cosigner after certain conditions are met.
The cons of cosigning for student loans are obvious and can include:
- Your credit score can take a hit if your child pays their bills late or defaults on their loans.
- You will have to pay off the student loans if your dependent fails to.
Parent PLUS Loans — Pros and Cons
Parent PLUS Loans are federal student loans taken out by parents to fund a dependent’s education. To qualify, you must be a biological or adoptive parent of a dependent attending school at least half-time, and you need to be able to pass a credit check.
These loans also come with an upfront loan fee that is taken out of each disbursement as a percentage of the loan amount. The current loan fee is 4.236%.
Advantages of Parent PLUS Loans can include:
- You can qualify for a fixed interest rate of 7.08%, and loan limits are generous and up to the cost of tuition minus other aid.
- You can repay Parent PLUS Loans over 10 to 25 years.
The disadvantages of Parent PLUS Loans are pretty obvious as well and can include:
- You are solely responsible for the repayment of these loans, and you can never transfer responsibility to your dependent.
- Loan fees add to the long-term costs of Parent PLUS Loans.
- These loans don’t come with any grace period. You can request a deferment while your child is enrolled at least half-time and for an additional six months after your child graduates, leaves school, or drops below half-time enrollment. However, interest will still accrue during this time.
Private Loans for Parents — Pros and Cons
You should also know that you can take out private parent loans to help your child pay for college. With a private parent loan, you can borrow money from a bank or private student loan company to pay for tuition and fees, and it may even be possible to have some of the loan funds sent directly to you so you can control spending on books and other college supplies.
There is also the potential for savings over federal parent loan options if the loan company does not charge origination or application fees. With private parent loans from College Ave, you can repay your loan over 5 to 15 years, and you can choose among multiple repayment options including interest-only payments depending on your needs.
Advantages of private parent loans:
- You can use your excellent credit rating to qualify for a lower interest rate
- Choose among flexible repayment plans
- Save on origination and application fees
Disadvantages of private parent loans:
- You are borrowing the money for school, so you are solely responsible for repayment
- You generally do not qualify for a grace period with private student loans
Other Factors for Parents to Consider
Parents should know that both private and federal student loans may offer tax benefits, and this includes Parent PLUS Loans. That’s because both private and federal student loans pave the way to deducting a certain amount of the interest paid on your taxes. Currently, the American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of higher education.
Parents should also consider repayment plans and monthly payments available. Where you can pay off Parent PLUS loans for 10 to 25 years, private student and parent loans all come with varying terms that can vary from lender to lender.
For example, College Ave lets you pay off undergraduate and graduate student loans over 5 years, 8 years, 10 years, or 15 years. A shorter repayment period can help you get out of debt a lot faster and save money on interest, but you will have a higher monthly payment during that time.
Which Option Works Better? Only You Can Decide
With all these details in mind, it’s easy to see how either option poses a certain amount of risk. Becoming a cosigner on a student loan forces you into a situation where your financial health is hinged on your dependent being responsible with their loans, but Parent PLUS Loans and private parent loans require you to be solely responsible for repayment, which may or may not make sense depending on how much assistance you wanted to provide.
Before you consider student loans, be sure you and your dependent have researched all funding sources including those that don’t require you, the parent, to commit to repayment at all.
For example, has your student researched enough scholarships? If you still fall short of covering your college costs, it almost always makes sense to tap out federal student loans in the student’s name that don’t require a credit check or cosigner first. That’s because federal student loans come with low fixed interest rates and federal protections like deferment, forbearance, and income-driven repayment plans.
Ideally, your child will borrow what they need first through federally backed student loans on their own, then only lean on you to fill in the gaps. At that point, you can decide whether to rely on student loans for parents or become a cosigner on a private student loan that might come with better rates and terms.