So, the graduation confetti has settled, the college acceptance letter is yawn-inducing ancient history, and you’ve spent what feels like a small fortune on dorm room hoopla. Just when you thought you could coast into late summer…bam! The first college tuition bill looms. Heavy sigh. How on earth are you gonna foot this one?
Well, my friend, parental determination often means cobbling together a mix of scholarships, savings, and the unavoidable student loans. But what happens when there’s still a gap to bridge? Tempted to take out further loans in your name to keep the pack afloat? Hold that thought.
You naturally want to do well by your kid, and let’s be frank, debt is an unsavory but often necessary side serving with the main course: a good education. Or so says Anora Guadiano from Wealthspire in the Big Apple. But hang on, don’t start signing up for every parent loan just yet. Weigh up the realities. Is this genuinely a smart move, or are you digging a financial black hole?
“None of us can predict our futures,” warns Guadiano, “but we sure as heck don’t want college loan repayments to be a forever fixture in them.”
Take a breather to crunch your numbers. How much can you genuinely afford? What loans make the most sense for your circumstance? Try to estimate the annual amount you’ll need to borrow. Visualise those unending monthly repayments. Can you work long enough before the Grim Reaper comes a-knocking to pay it all off?
Once you’ve sobered up from this harsh reality check, try to resist the siren call of the first loan you’re offered. “It’s essential to soak up all the intel before making a solid choice,” Guadiano wisely counsels.
Need a steer? Here are four common financing options for you to dive into:
1. Federal Parent PLUS Loans (A.K.A. The Dream vs Reality)
- Best for: Parents who look at the low-interest options and chuckle, or those in need of flexible repayment plans.
- Details: The federal government handily dishes out Parent PLUS loans as a life raft to families. They aren’t quite as fancy as the deals offered directly to undergrads. But hey, nearly 15% of new bachelor’s graduates have their parents’ names etched onto these. It’s a sort of shorthand rite of passage into adulthood.
Qualifying is easy peasy. You can borrow up to the full price of attendance, minus any financial aid that your kid has cleverly raked in. Got a “naughty” credit history featuring a recent bankruptcy or delinquent accounts? Then this option might not be for you. Remember, there’s a basic credit check involved.
However, in the words of the legendary Spiderman, “with power comes responsibility”; the borrowing can be almost too easy and might lure you into more debt than you can handle— not cool. Parent PLUS loans also have a steeper price tag than those borrowed by your student. Are you ready to shell out 9.08% interest with an origination fee of around 4.2% snipped off the amount you borrow for the 2024-2025 academic year?
Sticky note reminder: these loans kick off immediately. Talk about a slap in the face for unsuspecting parents. And the repayment isn’t optional. But Cathleen Wenger, an advisor at the nonprofit Thrivent, offers a silver lining— there are plenty of repayment choices available, including plans tied to your income. Parents laboring away in eligible public service jobs for a decade may even qualify for federal student loan forgiveness.
2. Private Student Loans (A.K.A. The Olympic League)
- Best for: Parents with sky-high credit scores and tolerable debt who can snag juicy low interest rates.
- Details: Got a credit score to die for? Good on you! You might be one of the lucky few who can tap into private student loans with reduced interest rates compared to the federal options. As of June 2024, fixed private loan rates kick off around 4.2%.
For those with less flattering credit scores in the low-to-mid 600s, you’re not entirely left in the cold. But brace yourself for interest rates that might swoop up to a dizzying 16%.
Some of these private lenders won’t charge origination fees and may offer in-school deferment or loyalty discounts on rates. Win! Be warned, though, they come with an Achilles heel: stricter terms. You’ll likely be hard-pressed to find income-based repayment options, and forbearance for hardship is as rare as unicorns.
3. Home Equity Lines of Credit (HELOCs) (A.K.A. The Roll of the Dice)
- Best for: Parents with heaps of home equity and good credit, who don’t blanch at using their home as collateral.
- Details: With U.S. home values getting their groove on and reaching record highs, a lot of families now find themselves sitting on a treasure chest of equity.
Oh, but here’s the rub – rising home prices have nudged higher HELOC interest rates too, currently hovering around a whopping 8% depending on your credit profile, zip code, and lender. Not to mention additional fees and closing costs apply, so you can kiss goodbye to some of that equity.
As Wenger points out, it’s a bit like being dealt a pair of twos in poker: not great, but you could still play the hand and win if the timing’s right. Or if you’re ultimately hopeful that lenders could reduce rates in the future.
However, there’s a dragon lurking in the dungeon. Your precious home acts as a safety net, which means if you aren’t able to keep up repayments, you could lose your family castle.”
4. Credit Cards (A.K.A The Flash and Burn)
- Best for: Parents hunting for rewards who can clear the debt rapido.
- Details: Let’s be straight here. Credit cards are NOT a long-term college financing strategy. The interest rates are a cruel joke. However, if your game plan is to maximise credit card perks and manage to clear the balance sharply, you might eke out short-term convenience, according to Wenger.
If you can’t pay off the balance in full, don’t even think about swiping that plastic on academia. Average rates are now a gasp-inducing 22%. The balance can, as Guadiano ominously forecasts, “spiral quickly,” potentially leading you to a financial abyss.
Now you know your options, it’s time to go forth and strategize. And if all else fails, remember you’re not alone.
Oh, and if your kid ends up inventing the next Facebook or TikTok, maybe they can pay you back with interest, eh?
*Adam Hardy provided the hard slog for this article.*
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