10 Ways Parents Can Borrow Smarter For College

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About a quarter of all the money the federal government loaned last year to help families pay for their college education went to parents, who have sharply increased their borrowing in recent years to cover high tuition fees.

Over the past decade, even as undergraduate student loans declined, parental borrowing under the federal PLUS loan program increased 16%, according to the College Board. According to the Education Department, this pushed total parents’ debt on PLUS loans to over $ 103 billion, an average of $ 28,700 per borrower, with billions more owed on private college loans. , held only in the name of the parents or co-signed with the children.

While borrowing for college can be a lifeline in helping your child get a degree, incurring such debt can also force you to pay high monthly payments that strain your wallet and threaten your future financial security. retirement.

A new News week Analysis of recently released parent loan data from the federal government shows how quickly many families run into serious trouble: about one in 10 parents default or are seriously in arrears within two years of leaving home. her child’s university. And in more than 150 schools of the nearly 1,000 colleges and universities listed in the database, rates of parental default and delinquency have reached 20% or more.

So, before you borrow to help pay for your child’s tuition, here’s what you need to know to manage loans wisely and avoid your own student debt crisis.

Before applying

Know your true cost. Some schools include Parent PLUS loans in the financial aid program presented to accepted students, which creates confusion about the true cost of school attendance. “Many families, especially those with children who are first generation American students, don’t realize this is a loan because of the way it appears on the help letter,” said Betsy Mayotte, president of the Institute of Student Loan Advisors. If the aid record is difficult to decipher, contact the financial aid office for help and a breakdown without the PLUS loan.

PLUS: college acceptance letter
Think twice before agreeing to take out a Parent PLUS loan to pay for your child’s dream college. About a tenth of parents have defaulted or been seriously in arrears within two years of leaving school.
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Maximize student loans first. Federal student loans for undergraduates carry interest rates of 3.73% for the 2021-2022 school year, almost half the rate of 6.28% for parents under the program. PLUS loans. Student loans also come with a greater variety of repayment plans and may offer partially subsidized interest. So before you even consider a PLUS loan, have your child borrow in their own name first: up to $ 5,500 for freshmen, $ 6,500 for sophomores, 7 $ 500 for juniors and seniors. If you have the financial means, you can always help them with the payments later.

Calculate the blow to your lifestyle. Since you’ll likely be taking out more than one PLUS loan to cover your child’s education, it’s important to think long term. If you borrow $ 15,000 this year, you will owe $ 170 per month for the next 10 years. Factor in a similar loan for another three years and you will be $ 60,000 in debt and owe $ 679 per month. This breakdown shows the impact of the loan on your future ability to meet daily expenses, save for retirement, or pay off other debts, like your mortgage.

Find other ways to pay. Check the online databases at FastWeb.com and CollegeBoard for scholarship opportunities. Some schools, such as Clarkson and Purdue, offer revenue sharing agreements, in which they provide a set amount for tuition in exchange for a percentage of the student’s post-graduation income for a specified period. Tuition payment plans, which spread the cost of college education over a 10-month period, rather than a lump sum, can also make payments more affordable.

Consider other loans. Banks offer home equity lines of credit with rates as low as 2.5 percent (the average is 4 percent), with no set-up costs and no closing costs. This makes it a compelling alternative to a PLUS loan if you own a home with healthy equity and a credit score of at least 620 (although a rating of 740 and above will get the best rates). Private parent loans charge interest rates as low as 3% and have no origination fees, but you will miss out on the protections offered by federal loans, such as disability or death forgiveness. ‘student.

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With PLUS loans, parents can borrow up to the full tuition fee each year minus any financial aid the student receives.
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After your approval

Borrow as little as possible. PLUS loans allow you to borrow the full cost of tuition, regardless of your ability to pay the payments. Just because they let you borrow as much doesn’t mean you should accept them. A good rule of thumb, according to financial aid expert Mark Kantrowitz: limit your total student debt for all children to a maximum of your annual family income, and less if you are under 10 years of age. retirement.

Start paying off immediately. Unlike student loans, payments on parent loans begin as soon as the money is distributed. You can defer for up to six months after your child’s graduation, but interest will continue to accrue; if you borrow, say, $ 15,000, with an interest rate of 6.28% and a 10-year repayment plan, that loan will climb to $ 19,240 by the time the repayments begin. “If you can’t afford the payment right now and plan to defer, it’s a sign that you shouldn’t borrow that amount,” Mayotte explains.

Let your employer help you. According to the Society for Human Resource Management, around 8% of employers offer student loan repayment assistance to workers, including Aetna, Google, and Hulu. While these programs often target younger employees, most of them also apply to older workers on Parent PLUS loans, says Kantrowitz. More companies are also expected to add this benefit, thanks to pandemic legislation that made $ 5,250 of this aid a tax-free benefit for employees until the end of 2025.

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Last year, one in four dollars in federal undergraduate loans went to people paying for a child’s or grandchild’s education through the federal Parent Plus loan program, with one loan average of $ 16,305.
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Let Uncle Sam help you. PLUS loan borrowers can deduct up to $ 2,500 in student loan interest per year from their taxable income, without itemizing. The benefit is gradually reduced if your income is between $ 140,000 and $ 170,000 for married couples, or $ 70,000 and $ 85,000 for single filers or heads of households. Earn above these amounts and you cannot claim the deduction at all. But for those who can, the break is worth up to $ 600.

Take a break. In financial difficulty? Don’t just stop making payments, which can cause the government to foreclose on your wages, Social Security benefits, or tax refunds. If the problem is temporary, you can ask for forbearance or suspension of payments, up to 12 months. Alternatively, you can reduce monthly payments by switching to a 25-year repayment plan, instead of the standard 10-year, or an income-based plan that will limit payments to 20% of your discretionary income (after 25 years, any remaining balance is canceled). The downside to all of these options is that you’ll pay more interest and take longer to get out of debt – you could pay for a good chunk of your retirement, or even the rest of your life.

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Illustration by Alex Fine for Newsweek

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