Understand Private Student Loans From a Parent Perspective
The terms remaining costs to pay or remaining balance appear on a student’s financial aid offer when all other financial aid, including federal student loans, has been subtracted from the college’s total cost of attendance and there is still an amount owed to the college. If this is true in your student’s case, your family may be considering supplemental or private student loans. As a parent, you may be asked to cosign, and it’s important you and your student both understand the financial commitment.
Why It Matters
- Federal student loans are limited.
While federal student loans are generally available to all college students who complete the FAFSA, they have a set limit for each year of study. In addition, depending on your family’s financial circumstances, your student may have a mix of subsidized and unsubsidized federal student loans that will mean a difference in whether or not your student is responsible for paying interest in school. Adding private loans with their own terms to the mix can be confusing. - Your student may need a cosigner.
Your student may not be able to meet the underwriting criteria for a private student loan without a cosigner, or a cosigner may help your student qualify for a lower interest rate. Often parents become cosigners to help their student meet the underwriting criteria. As a cosigner, you become equally responsible for the debt, which means you will pay if your student cannot for any reason. - Student loans are a financial commitment.
Anyone who borrows a student loan that is then disbursed to the college becomes responsible for repaying the debt, even if the student doesn’t graduate, isn’t able to get an anticipated job or salary, or faces financial hardship later. Interest works differently on student loans than on other financial products, and falling behind on payments or making only partial payments can mean progressing further into debt over the life of the loan.
What Your Student Can Do Now
- Carefully reconsider the need for student loans.
Your student may have already considered ways to borrow less (February Article Two on your personal dashboard) or made wise student loan decisions (March Article One on your personal dashboard). If not, now is the time. While a reasonable amount of debt may help your student feel invested in his or her own education, a need for excessive student loan debt may mean your student should reconsider choice of school, working for income during school, or postponing one or more years of education. - Create a financial plan.
Before asking you, another relative or someone else to cosign student loans, your student should be aware of that person’s responsibility for the debt. Cosigning a student loan is a serious financial commitment. Before the student graduates and is able to take on debt, an older adult who cosigned may be approaching or in retirement, facing increasing medical issues or having other financial issues. - Understand the terms of any loan under consideration.
Before taking on student loan debt, your student should understand how interest accrues daily and when for what reasons unpaid accrued interest will be capitalized — added to the loan balance — such as when the borrower leaves school or when payment assistance like deferment ends. When interest capitalizes on debt you owe, it becomes part of the principal balance and the new higher balance all accrues interest. It’s important to know how much the total debt will be at graduation, how much monthly payments are expected to be and how many years payments need to be made. In addition, different student loans have different options for assistance or reduced payment plans when the borrower isn’t able to make payments, as well as different policies for when a student loan may be discharged.
What You Can Do
- Decide on your role.
Depending on your own financial circumstances, you can decide whether to cosign a student loan for your student, borrow your own loan to help your student with costs or help your student financially in other ways. - Understand the terms of the loans under consideration.
As your family explores options for private student loans, you should also understand how each loan works. Does it have a fixed or variable interest rate? When are loan payments required? Should you make interest payments while your student is in school? You and your student may wish to research together to understand interest accrual, repayment amounts and terms, repayment plans and options like a cosigner release policy, where a cosigner can be released from the commitment to pay after a certain number of payments are made on time and the borrower’s credit can solely support the loan payments. - Know the effects of student loan payments on your personal budget.
Depending on your own savings for retirement, your age, your health, potential changes to your own income and other factors, student loan payments can have a large detrimental effect on a parent’s budget. Carefully consider whether the payments will create a hardship if your student is not able to make them.
Next Steps
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