Next year’s first college bills are coming out, and students and families are looking for ways to pay for any amount not covered by financial aid, savings or earnings. Many turn to private education loans at this time of year. Because most traditional-age students need cosigners to qualify or receive better rates or because you would like take out a loan in your name to help pay a child’s expenses, you as a parent may be investigating student loan options yourself.
Iowa Student Loan Liquidity Corporation educates students and families on planning and paying for college, as well as providing education loans under the name ISL Education Lending. As an ISL board member, I want to help ensure that families understand the pros and cons of taking out student loans. I encourage you to remember the following tips for parents who want to help with education loans.
1. Loans are a financial, not emotional, decision.
As a parent, you want to see your student attend the institution of their choice, regardless of cost. But, education loans are a financial commitment that could affect your and your student’s credit for years to come.
2. The total repayment amount will be more than the original loan amount.
In addition to any origination, late or other loan fees, the principal balance will accrue interest throughout the loan term. At times, unpaid accrued interest may be capitalized, or added to the balance. If you or your student have periods of financial hardship, assistance may not stop the accrual of interest. Smaller payments may not be enough to significantly pay down principal.
Federal PLUS loans for parents taken out July 1, 2022, through June 30, 2023, have a fixed interest rate of 7.54%, with an upfront loan fee of 4.228%. ISL Education Lending offers the College Family Loan with fixed annual percentage rates of 3.19% to 7.40% with no fees.
3. Federal loans offer different features than private loans.
The federal parent PLUS loan is available only to biological and adoptive parents and, in some cases, stepparents. Borrowers may choose from repayment plans and may qualify for repayment assistance options. Approval for a PLUS loan does not consider an applicant’s income, outstanding debt, assets or years to retirement, so the borrower needs to predict whether they can afford to repay the debt.
Private loans for parents, like the College Family Loan offered by ISL Education Lending, may be available to parents or other family members or people who want to help a student. You may also be able to pre-qualify to see your rate, based on underwriting criteria, before you apply. You may also be able to choose among repayment options to suit your situation.
4. You may be liable for the debt.
A federal parent PLUS loan or a private loan that you take out for the benefit of your student is your debt, regardless of any understanding you have with your student on who will pay it back.
When you cosign a student loan, you are equally liable for the debt. That means if your student fails to make payments or makes late payments, that delinquency and default affect your credit too and the lender will attempt to contact you for payment. If the lender allows the borrower to release the cosigner from the debt obligation, pay careful attention to the requirements to obtain that benefit.
5. You may face changing circumstances.
Student loan repayment may take 10 or more years after your student leaves college. Consider what your circumstances will be during that time. Retirement, health issues and other factors may change your financial situation.
6. You can take steps to help ensure successful repayment.
Do your research to understand interest rates, terms and fees, available assistance options and how they affect repayment, and borrower benefits for available loan options. Estimate a realistic starting salary for your student and how student loan payments will affect their budget. Encourage your student to make good decisions throughout college to graduate on time, reduce overall borrowing and achieve a well-paying job.
Tools to help you and your student with the above steps are available free on our website at www.IowaStudentLoan.org.