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It’s natural to want to take care of your child. It’s also natural to balk at paying tens of thousands of dollars (maybe more) for his college education. The dilemma gets more complicated when you think, “If I can't afford tuition, how can a student right out of high school afford it?” And what if you have more than one college-bound child?
Once gift aid has been awarded and the accountants consulted, many families turn to education loans to meet the Expected Family Contribution (EFC). But who should borrow these loans: the student or the parent?
If the Student Borrows …
Chances are your 18-to-22-year-old doesn't have much of a credit history or the income required to qualify for a traditional consumer loan. That’s okay, because consumer loans aren’t ideal education financing vehicles. School-certified student loans, however, are built for the student (or parent) borrower, with lenient credit eligibility, lucrative tax benefits, and forgiving repayment terms.
If your child takes a student loan, the first ones he chooses should be Federal Stafford Loans. With a low, fixed interest rate of 6.8% and no payments required until after graduation, it’s no wonder they are the most common student loans. The downside is that Stafford Loans carry annual borrowing limits that often aren’t high enough to cover a year of college costs.
A supplemental student loan option is a private or alternative education loan that is school-certified. These loans allow students to borrow up to the cost of attendance (minus other aid). There are eligibility requirements, but private loans are accessible and affordable financing options for students.
Private student loans give students the option of starting repayment during college, but most lenders allow deferred repayment until after the student leaves school. Though interest accrues, students can concentrate on their studies and the “college experience” instead of taking a job to fulfill debt obligations throughout their college years. When repayment begins, they’ll be able to take a tax deduction for interest paid on qualified student loans.
If the Parent Borrows …
College loans for parents are a little bit different than those for students. While there are federally and privately guaranteed varieties, the eligibility requirements and repayment terms are designed for the more experienced borrower.
A parent who borrows money for school should look into Federal Parent PLUS Loans first. Contrary to popular misconception, a borrower cannot be turned down for earning too much (or too little). A parent of a dependent undergraduate need only be creditworthy and meet U.S. citizenship requirements.
If parents are ineligible to borrow Federal PLUS Loans, like students, they should consider private or alternative education loans. An example of such is a Sallie Mae Private Loan.
The advantages of parents borrowing either federal or private loans include tax deductions for interest paid on qualified loans, and no aggregate borrowing limit (so you can finance all your children in school).
Education loans for parents carry repayment terms that differ from loans for students. While parents can often choose a repayment schedule, there is no automatic deferral until the student leaves school; that is, repayment begins immediately.
The Bottom Line …
Paying for college is a lasting financial commitment, and the only way to determine the right course of action is to evaluate your family’s current circumstances and short-, mid-, and long-term goals.
You may choose to employ one, some, or all of the above loan options to cover college costs. And you can get creative: some families have students take Stafford Loans and the parents pay them down; conversely, some parents unofficially turn over PLUS Loan payments to their kids once they’re out of school. (Remember, whoever applied for the loan is responsible for repaying it!)
Student loans are good debt; not only are they investments, but they can earn the borrower tax advantages and rewards from a lender. Who takes the risks and the ultimate spoils is up to you and your child.
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