Parent loans can help children attend their dream school, but be wary of borrowing on their behalf

A parent loan may be able to help your student in paying for college. Image: Getty

A parent loan can help bridge the gap between your child's financial aid and the cost of college.

As a parent or guardian, you can borrow money on behalf of a student to help pay for their education. You can obtain a government or private parent loan and will be fully responsible for repaying it.

What exactly is a Direct PLUS Loan?

The federal option for parent loans is the Direct PLUS Loan. PLUS is an acronym that stands for Parent Loan for Undergraduate Students. You can use them to cover expenses not covered by other forms of financial assistance provided by your child's school.

These loans, also known as Parent PLUS loans, are made by the US Department of Education. If you have a bad credit history, you won't be able to get one. The total amount available to you will be determined by the cost of attendance minus any other financial aid your child receives.

These loans have fixed interest rates and payback terms of up to 25 years. Payments will be made either monthly or quarterly. The first payment is usually due 60 days after receiving all of the funds.

"Taking out a Parent PLUS loan can make sense if your credit history is clean and you want a borrowing option with flexible repayment terms," says Leslie Tayne, a financial attorney specializing in student loan debt. "You should also make certain that you are not jeopardizing your ability to retire by incurring this debt for your child."

The rate is set at 7.54 % for the 2022-23 school year. Because the loans are unsubsidized, interest will accumulate while your child is in school. Due to the coronavirus pandemic, interest payments on federal student loans have been suspended until the end of August 2022.

You will also be charged a 4.228 % origination fee, which will be deducted from the loan disbursement. A Direct PLUS Loan has no prepayment penalties, so you can pay it off early without penalty.

What is the definition of a private parent loan?

A private parent loan is money you borrow for your child's education from a lender such as a bank, credit union, or online institution. Depending on the lender, interest rates and term durations differ.

Private loans may have lower interest rates than federal loans, but they usually come with fewer protections. They were, for example, exempt from the Biden administration's moratorium on student loan payments. They would also be ineligible for any large-scale loan forgiveness programs.

Kate Mielitz, special groups manager at the Association for Financial Counseling & Planning Education, adds, "I'm not a fan of private loans." "Variable interest rates are common. Even if they don't, the repayment period begins practically right away. There is no time limit for deferment. At the very least, parent PLUS loans provide a deferment option."

What is the difference between a Direct PLUS loan and a private loan?

When comparing the two parent loan choices, there are various factors to consider. When making a selection, Lyle Solomon, a consumer finance specialist and lead attorney at Oak View Law Group, believes there are five crucial things to consider:

• Interest rate type: The interest rates on Direct PLUS loans are fixed. With a private company, you can select between a fixed and variable loan.
• The rate of interest: The interest rate on Direct PLUS loans is 7.54 percent. Private companies may begin with much cheaper rates, albeit the rate you receive will be decided by your credit score.
• The origination fee: The origination fee on a Direct PLUS loan is 4.228 percent. The origination fee on private loans varies by lender, and some charge none at all.
• Duration of the term: The terms of private student loans range from five to twenty years. The terms of direct PLUS loans range from 10 to 25 years.
• Is the FAFSA required? For a Direct PLUS loan, you must complete the Free Application for Federal Student Aid. This is not required for private loans.

Both types of loans need a credit check and allow you to borrow up to the cost of attendance. Interest payments may be deducted from your taxable income.

Before you take out a loan for your child, there are a few things to think about.

This may seem personality, but keep in mind that any debt you incur as a result of a parent loan must be repaid. Make sure you have the financial means to repay any debt you incur, even if it's to enable your child attend their dream school.

Also keep in mind that you're the only one on the hook with the lender, regardless of any agreement you make with your child — for example, perhaps they pay back a portion of the parent loan themselves.

"If you or your student cannot afford to take on enough debt to cover the overall cost of attendance," Solomon adds, "a new plan may be essential." "Making extra money during the school year and during breaks can assist your student in paying for college bills as they occur."

You can save money on a loan by making payments while your child is still in school, which lowers the overall interest you'll pay.

According to Mielitz, you should make sure you can afford a parent loan on a monthly basis.

"I definitely want students in college," says Mielitz, a former college professor. "However, college is not for everyone. Parental loans are not suitable for everyone. Consider the costs, especially your costs, because this is your parent loan before signing on the dotted line. Community college or junior college is an excellent way to begin your college education at a lower cost."

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