Note: This content is part of a paid partnership between Citizens Bank and Her Money Media
In recent years, parents have been borrowing more and more to cover their childrens’ college costs… But many parents are wondering: Should I borrow money for my child to go to college?
Federal Parent PLUS loans accounted for 23 percent of federal lending for undergraduates in the 2017-2018 academic year — a significant boost from 14 percent in 2012-13, according to a report published by the Urban Institute. But more than six in 10 parents borrowed more than their expected family contribution (EFC) in 2015-2016, which could translate to repayment struggles down the line.
If you’re looking for guidance as far as your options, we’ve got you covered. HerMoney spoke with Christine Roberts, head of student lending at Citizens Bank, for her take on parents’ borrowing options for a child’s college tuition.
Should parents borrow for their child to go to college?
There are two ways a parent can help “fill the gap” between what a school offers and what the family has saved for that child’s education, says Roberts: You can either take out a loan directly as a parent (meaning you’re “100 percent responsible” for that debt) or you can co-sign (meaning your child is primarily responsible but you’re the backup). You’re essentially “lending your credit file” to your child, says Roberts, so that they can snag a better interest rate.
The final decision here truly depends on the family’s unique dynamics and financial situation — there’s no one-size-fits-all answer, and every family has to make this decision for themselves. Some families believe the child needs “skin in the game” and choose to be there as a fallback if the child can’t make the payments, while others feel the parent should be fully responsible for the debt.
“It all just really depends on what’s right for you and for your family,” says Roberts.
How do these types of loans differ? Can loans that parents take out be refinanced and paid off at the same rate as the loan that a child takes out?
One of the most important considerations here is choosing a school that’s affordable for your family’s unique financial situation: “Make good decisions about where you’re going to school so that you’re not overborrowing,” says Roberts.
Beyond that, it’s important for parents to consider all of their borrowing options. One option is the federal Parent PLUS loan, which currently has a 4.25 percent fee and may be a good option if you don’t have strong credit, says Roberts — with it, parents can borrow up to the cost of attendance and repay it over a 10-year term. There’s no co-sign option available.
Another option is private loans for students or parents (or co-signing a private loan). These could be a good option to look into if you have stronger credit, since that should mean a lower interest rate. There’s generally more choice available with private loan options, says Roberts — fixed or variable; 5-, 10- or 15-year term; consolidating loans for multiple students into one parent loan; and potentially even refinancing a parent loan while the student is still in school.
When is it the “right move” or “wrong move” for a parent to take out a loan for their child?
It depends on the family’s unique financial situation, as this is a very personal decision, but it’s important to remember that your child’s earning potential will always have a longer tail than your own, says Roberts — just keep in mind that you can’t borrow for retirement. It’s important to make sure you don’t “overburden yourself in retirement,” says Roberts — or have to completely postpone or cancel your retirement — due to taking out student loans for a child.
It’s also important to look at your entire financial picture and family composition. If you have multiple children, for instance, and savings need to stretch across their education, it’s a good idea to sit down and have an open conversation about how much each child can expect to help with their tuition.
“The reality is: Every family’s going to make the decisions that are best for their family,” says Roberts.
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