Many families go into borrowing for their first child’s college education without considering exactly how they’re going to pay for future years, or for younger siblings. There’s no question that the first college bill is stressful, and it’s normal—and totally understandable—to get laser-focused on how you’re going to pay for it.
But if you’re borrowing for your kids, it’s important to figure out what your financial profile can reasonably handle, particularly if you have multiple children heading to college. You can end up being denied loans when your student is mid-college career or, worse, find yourself stuck with a payment you can’t afford.
The good news that is more families are planning for multiple years of college — 58% this year compared to 44% in 2019, according to Sallie Mae’s How America Pays for College 2021 report. If you’ve got little ones (or somehow-now-taller-than-you-ones) heading to college soon, here’s what to consider about the college loan landscape.
Your Family’s Best First Option: Federal Student Loans
Experts always recommend looking to the federal direct student loan first, before exploring other loan options. These loans come with low interest (3.73% in 2021-22) and a variety of payment options that start after graduation (or whenever the student drops back to a status of less-than half-time). The problem with federal direct student loans is that many families need to borrow more than the annual federal student loan limits to cover all their college costs. If you find yourself in that situation, it’s important to be strategic about your next student debt moves.
Private Student Loans Require A Co-Signer (Almost Always!)
Most parents don’t realize until their child’s senior year of high school that their student won’t be able to get a private student loan on their own, says Luanne Lee, a college planner and owner of Your College Planning Coach. Why? Students typically don’t have the income or assets to qualify. This is often when parents turn to other loan options that involve putting their credit on the line, and and tying their credit to their child’s loan. With a stellar credit score, it’s possible you might qualify for a great interest rate the first year — sometimes better than the federal Parent PLUS loan of 6.28% (right now, private loan rates can range from 1% to 13%, depending on credit score and variable or fixed interest rates). But your debt-to-income ratio changes every year you borrow, which means interest rates on subsequent loans may increase. If you take on increasing amounts of debt for every year your child is in school, it’s very possible you could be denied any additional private loans a couple of years into your child’s college career.
Federal Parent PLUS Loans: Easy To Get, But Easy To Get Upside Down
The federal government generally lets parents take out PLUS loans regardless of income, unless you have adverse credit. (NOTE: If you’re denied a PLUS loan, your student will then be eligible to borrow more in federal student loans)
Assuming you’re eligible to borrow, you’re allowed to take on up to the cost of attendance minus any financial aid and scholarships. Given the cost of college these days, that means you could be taking on a lot of debt, every single semester. The problem is “oftentimes, the parents can’t afford the payments, which start soon after disbursal,” Lee says. In addition to the 6.28% interest rate, there’s a 4.228% origination fee (2021-22 rates). Unlike private student loans, the PLUS loan comes with an income-driven repayment plan if you run into trouble. It’s also possible to defer payments— but these loans are easy to get upside down due to the amount parents could potentially borrow and loose income safeguards for who gets approved.
According to Patti Hughes, owner of Lake Life Wealth Advisory Group in Chicago, if a parent borrows $25,000 in total (over four years) for one of their children using a PLUS loan, the payment would be $208.33 per month. For two children, the payment would be $416.66. And that’s with borrowing just $6,250 per year, per child. Hughes has seen parents who are coping with much larger monthly loan payments — well over $2,000 per month. That’s a figure that simply isn’t doable for most families. Ask yourself what you can realistically afford as a monthly payment, and make certain you don’t take out more than that.
Plan Backwards FTW
As much as we might wish there were, there’s no magic money formula to guide parent borrowing. Every individual’s situation will be different, Hughes says. But there are a few important things to consider: Your age, how much you’ve saved for retirement, when you plan to retire, and what you can afford as a payment based on expected retirement income, she says.
“Parents should also consider their health, other debts including mortgage, auto and credit cards, and if they have disability and life insurance to help fund college costs,” she says. Also, consider your job stability as part of the equation, because a job loss can impact your ability to qualify for a loan (and of course to make those loan payments when the time comes.)
Still Fuzzy On The Details? Let’s Try A Sample Equation
Let’s say your student graduates from college when you’re 54. If you plan to work until you’re 62, “then it would be important to consider what you might have available to put towards student loan debt for the 8 years you are working, and then calculate how much you could afford to pay once retired,” Hughes says. If you’re using the standard 10-year repayment plan, on either PLUS or private loans, you’ll be paying on the loan until you’re almost 65, which could impact saving for retirement in those 10 years prior to retiring, she says. And if you have a mortgage, a student loan payment can strain retirement finances. These are all just examples, and you can find something that works for your unique situation! Just use a loan simulator like the federal loan simulator or this one to run through some possible scenarios.
Whenever Lee works with families, she calculates potential loan amounts for all four years, taking into account the number of kids in the family going to college, along with their ages. She and her clients discuss possible variables, including how (or if) they can pay a portion from their current income, and whether they’ll need to work longer before retiring. For parents, it’s also important to consider your student’s future income in a way that they might not fully understand just yet — different careers have vastly different earning trajectories, so consider how comfortable your child will be paying down their private student loan once they graduate.
“Unfortunately, a student can’t go back to community college halfway through their 4-year degree,” Lee says. “If families are looking at 100% borrowing, they need to reassess, and look at things like starting at community college, joining the military, getting a certificate for a job in that field, or working for an employer that might have tuition reimbursement.”
Yes, college costs are crazy high, and only getting higher. Many families feel stuck, so you aren’t alone. But as you do your research and put pen to paper, keep in mind that it’s always better to explore loan and payment options in advance. Once you’re empowered with the facts and figures you need, you can look for a more affordable path before committing to payments you (and your child) can’t handle. You got this.
More on HerMoney:
- The Top 5 FAQ About Refinancing Student Loans
- LISTEN: HerMoney Mailbag: College, Education, and Student Loans
- More Than One Kid = More Than One College Bill. Let’s Strategize
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