Many parents take out student loans to finance their child’s education. But not everyone shares this information with their son or daughter. That silence is a slight misstep for parents who choose to borrow student loans on their own behalf. Other problems can include prohibitive payments, unclear expectations about repayment, and not taking advantage of an opportunity to help the child build credit. To prevent student debt from derailing their families, parents should assess their financial situation and speak openly with their children before borrowing student loans.
Extension Heading: Assess your financial situation and speak openly with your child before borrowing parent-student loans
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Byline: RYAN LANE von NerdWallet
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In more than a third of US families, parents make decisions about how to pay for college, according to a July 2020 report by private lender Sallie Mae.
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Half of these parents do not inform the child of their decision.
Joe Allen, 51, of Frederick, Maryland, spoke to his daughter, a freshman at the University of Dayton, Ohio, about college expenses. But he understands why some families avoid the topic.
“As a parent, you want to protect your children,” says Allen. “You want to do the best for her.”
But what seems best for kids can be bad for mom or dad – especially if it means taking out hefty student loans for parents without discussing them. How to avoid these and other missteps when borrowing parental credit.
ASSESS YOUR SITUATION
Students should take advantage of free money and federal loans on their behalf to pay for college. Parents can then use federal PLUS loans or private loans to cover the remaining costs.
However, first check your current financial situation with your child.
“Be realistic with yourself and your family about what (your) finances are and what is the best decision for you,” says Rick Castellano, spokesman for Sallie Mae.
Do not borrow parent-student loans if they put your retirement at risk, if you are heavily in debt, or if you cannot afford to pay. For example, the nonprofit Trellis Company surveyed more than 59,000 parents whose children were in school in Texas and found that most said they would struggle with loan repayments at some point.
PERFORM A CONVERSATION
Kathleen Burns Kingsbury, an expert on wealth psychology and host of the Breaking Money Silence podcast, says that talking about big expenses like tuition can make people uncomfortable and emotional.
That doesn’t mean you should avoid the conversation.
“It’s okay for people to get upset,” says Kingsbury. “The trap is when people get upset and don’t come back to it.”
Instead, use this opportunity to talk about how much you’re borrowing and teach your child how to analyze the value of a large purchase.
Allen says he went through a sample budget with his daughter to illustrate the cost of their loans and how they might limit their flexibility in the future.
He liked that the exercise made things more specific than “just saying not to take on debt”.
Find out who is in charge
An interview is also required to determine who will repay the parent’s loan.
If your child does so – and 45% of families expect the parent and child to at least share that responsibility, according to Sallie Mae’s report – it can influence your decisions.
Angela Colatriano, marketing director for College Ave Student Loans, says some families want the child’s name on the loan because he or she will pay it back.
“You don’t want a handshake agreement,” she says.
However, only the parent is legally responsible for a Eltern-PLUS loan. You need to weigh these up when considering loan options.
PLUS loans have less stringent loan requirements than personal loans and offer the same fixed interest rate to all. However, PLUS loans also have high origination fees and are only available to parents – legal guardians and grandparents, for example, are not eligible.
Your ultimate goal should be to get the cheapest loan that you qualify for. If this is a PLUS loan, make sure everyone is on the same page to repay.
Kingsbury suggests writing a simple, unilateral agreement that “states what the expectation is and what happens if there is a conflict”.
NOTE CO-SIGNING
Parents who prefer private credit can borrow on their behalf or sign it with their child. Either option means that you are responsible for the loan.
“It depends on a family decision,” says Castellano. “Families should explore both options.”
But he says co-signing can benefit students in ways that borrowing on their own can’t, such as building credit.
Since a co-signed loan has two applicants, you may get a better interest rate. However, the underwriting guidelines for lenders are different.
For example, Allen initially received a much higher interest rate on a co-signed loan than expected. The lender told him it was because his creditworthiness was combined with that of his daughter.
“I didn’t understand that,” said A.
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