Understanding Student Loans for Parents

With the cost of college more than doubling in the past twenty years, it is hard to imagine today’s parents being able to pay for college out of pocket. Even parents who carefully saved and invested may be unable to pay the full price of higher education. Student loans are a necessity and parents need to understand them.

Costs of College Keep Rising

According to the College Board, in 2023, the average tuition and fee costs are $39,400 for a private college and almost $10,940 for an in-state public college. Out-of-state students at state schools will pay more than double the in-state amount. Because of these high numbers, loans may be a significant part of your student’s financial aid offer no matter where they choose to go.

Understanding the different types of loans available for your student and family is very important as a parent since they are paid back over a long time period. Some parents and children, especially for graduate degrees, may still be making student loan payments in retirement. Consolidated student loans can have a repayment period of up to thirty years!

What is Financial Aid?

Simply put, financial aid is the offer package put together to encourage your student to attend their school. Offers made to accepted college applicants are based on the results of your family’s Free Application for Federal Student Aid (FAFSA) form and their college application. The FAFSA is filled out by parents and the dependent student annually, using financial information from the “prior-prior” year. For instance, the FAFSA for the 2021-22 school year uses tax records and financial information from 2019. The information submitted on the FAFSA is used to determine your family’s Expected Family Contribution (EFC). Colleges then use the EFC to create your student’s offer. An offer may include scholarships, merit awards, need-based grants that do not need to be paid back, and federal student loans, which need to be paid back after graduation. You can accept all or part of the federal student loans.

What type of federal student loans are available?

The federal government established The William D. Ford Federal Direct Loan Program (Direct Loan) in 1994. The US Department of Education is the lender under this program. There are four types of loans offered under the Direct Loan Program.

Direct Subsidized Loans

Direct Subsidized Loans are loans are based on financial need. Eligible students can borrow to help cover the cost of a college or career school. Students must attend school at least half time and be an undergraduate, graduate, or professional student. The school attended decides the amount of money that may be borrowed from the federal government each year. The amount that can be borrowed also depends on what year the student is in school and whether they have a dependent or independent financial status.

For a four-year undergraduate program, students can receive direct subsidized loans for only six years. This is worth noting since 60% of bachelor’s degree students finish their degrees in 6 years. The amounts borrowed vary from $5,500 to $12,500 per year. For Direct Subsidized Loans, the Department of Education pays the interest that accrues while the student is at least half-time and six months after graduation. The student has a six-month grace period after leaving school before they need to start paying back the loan.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to eligible undergraduate, graduate, and professional students, but financial need does NOT determine eligibility. The school decides the loan amount. It bases the loan amount on tuition and any other financial aid the student may already receive, such as merit scholarships and grants. Like Direct Subsidized Loans, a student may borrow between $5,500 and $12,500 per year, depending on what year they are in school. The student needs to be at least a half-time student.

The big difference between a Direct Subsidized Loan and a Direct Unsubsidized Loan is since the Department of Education is not paying the interest, the interest starts to accrue right away with Direct Unsubsidized Loans. If the interest is unpaid during school years, the amount adds to the principal loan and accrues interest. This includes the six-month deferment period after graduation. Due to this, students can end up paying much more than they borrowed.

Direct PLUS Loans

Direct PLUS Loans are intended for parents of undergraduates as well as graduates and professional students. They are meant to pay for education expenses not covered by financial aid. Financial need is not the determining factor to be able to get one of these loans. However, a credit check is required, and borrowers must have good credit to be awarded a Direct PLUS Loan. Students must attend school at least half-time.

The maximum amount a borrower can receive depends on the school’s cost and any other financial aid that is awarded. There is no cumulative dollar limit. As with other federal loans, parents may request a grace period of up to six months after the student graduates, leaves school, or drops below half-time.

Direct Consolidations Loans

Direct Consolidation Loans allow you to combine all your federal loans into a single loan with one loan provider. The fixed interest rate is based on the average interest rates of the loans being consolidated. Federal loans can be combined at no cost to the student. Private lenders may offer consolidations but for a fee. Once the loan consolidation is complete, a single monthly payment is made on the new loan, rather than multiple monthly payments on the previous loans. Loan consolidation also gives access to additional loan repayment plans and forgiveness programs. Direct Consolidations Loans can have a term of up to thirty years.

Should You Consider Private Loans?

If you have good credit, private loans may cost less than a Parent PLUS Loan due to Parent PLUS Loans’ origination fees and interest rates. There are many options for private loans through local banks, credit unions, and online banks. Because of this, borrowers should shop around for their lowest qualifying rate. Through a pre-qualification process, some private lenders will show a personalized rate before pulling a final credit report. However, Parent PLUS Loans could be a better option if you ever want to access the federal repayment plans, including deferment and consolidation.

About 1% of parents use home equity loans or a home equity line of credit (HELOC) to pay for education expenses. It certainly is an easy option- no FAFSA required, although you will need a FAFSA for any other financial aid, including scholarships. It’s often easily accessible and available quickly. Home equity loans may be cheaper than other loans, including Direct PLUS Loans. Depending upon the amount of equity, families may be able to fund a high-cost college or university.

Before 2019, home equity loan interest was tax-deductible, even if it was used for educational expenses. As of 2019, the IRS revised the deduction so that the interest is deductible only if used to buy, build, or substantially improve a taxpayer’s home that secures the loan. The loss of the interest deduction is not the most significant drawback, though. The biggest drawback is you are putting your house on the line. With a home equity loan, the house is the collateral. If parents can’t pay back the loan, there is a danger of losing the house. That is a high price to pay when there are other funding options available.

The Bottom Line About Understanding Student Loans for Parents

Federal loans do offer some benefits over private loans:

• The interest rate on federal student loans is fixed and typically lower than private loans if your credit isn’t great. Much lower than a credit card (never a great way to pay for school).
• You don’t need a cosigner or credit check for most federal student loans.
• You don’t have to begin repaying your federal student loans until six months after completing or leaving school. This is not an option with private loans.
• If you qualify for Direct Subsidized Loans, the Department of Education pays the interest while you are in school.
• Federal student loans offer flexible repayment plans with options to defer in hardship cases or a return to school.
• If you work in specific fields, you may be eligible to have some of your federal student loans forgiven.

The best place to start researching your financing options is at your student’s college or university’s financial aid department. If the students are high school seniors, their high school guidance counselors can also offer a wealth of information. Be sure to talk to other local parents that have been through the process before. Often, there are resources right in your community to help. We discovered a foundation in our town that offered interest-free loans of up to $10,000 per student over four years through other local parents. The students needed to be enrolled full-time and keep a certain GPA. The loan remains interest-free without accrued interest as long as the students pay it back on time through monthly payments after graduation. This foundation loan was not widely known or promoted. If we hadn’t talked with other parents, we never would have known!

Free Resources on Student Loans

https://educationdata.org/

https://finaid.org/

https://www.retireguide.com/

https://studentaid.gov

https://www.usnews.com/education

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