Private Student Loans: A Parent’s Guide to Helping Your Child Pay for College

Watching your child head off to college is an exciting moment—but also a stressful one. As a parent, you want to support your child in every way possible, especially when it comes to funding their education. However, with the soaring cost of tuition today, many parents are finding that paying for college requires a bit more planning and financing. In the 2019-2020 academic year, families spent an average of $30,017 on college, which includes tuition, fees, and living expenses. This can be daunting, even with scholarships, grants, and federal aid. As a result, many parents turn to student loans, whether through federal programs or private loans, to bridge the gap.

What Are Your Loan Options?

As a parent, you have several ways to help pay for your child's education:

Parent PLUS Loans: These federal loans are specifically for parents of dependent undergraduate students. They come with a fixed interest rate but also include some limitations, like fewer repayment options and relatively high interest rates compared to private loans.

Private Student Loans: Offered by private lenders, these loans come with a variety of interest rates and repayment terms, often depending on your credit score. Private student loans offer more flexibility when it comes to choosing the loan amount, repayment schedule, and options for lower rates if you have a strong credit history.

Now, let’s compare these options and look at how private student loans might offer greater flexibility for parents with good credit.

Directly Paying for College

If you’re fortunate enough to have the funds available, paying directly for your child’s tuition might seem like the most straightforward option. By using savings, a home equity loan, or a personal loan, you can fully fund your child’s education without the need for student loans.

Pros: This method avoids the hassle of loans altogether, meaning neither you nor your child will have to worry about making payments later. It’s also an option that won’t impact your child’s future credit.

Cons: The downside is that taking out a personal loan or home equity loan means immediate repayment, which can strain your financial situation. Paying out of pocket also leaves your retirement savings untouched, so it’s crucial to consider whether you can afford it without jeopardizing your future financial stability.

Co-Signing a Loan: What Is It and Who Can Consider It?

A co-signer is often required for private student loans, particularly when a student has limited credit history. As a co-signer, you’ll take on the responsibility for the loan if your child is unable to make the payments. This can be a good option for students who are unable to qualify for a loan on their own due to a lack of credit history or income.

Pros: Co-signing allows your child to secure a private student loan that they may not have been able to obtain on their own. This can give them access to better loan rates and more flexible terms. In some cases, your involvement can even help your credit score, provided payments are made on time.

Cons: The biggest risk of co-signing is that you’re responsible for the debt if your child defaults. If they miss payments or fail to meet the loan terms, your credit could take a hit, and you could be required to pay the balance. It’s also important to note that the loan will show up on your credit report, increasing your debt-to-income ratio and potentially affecting your ability to take out future loans.

Why Private Student Loans Might Be the Right Choice

For parents with good credit, private student loans often offer better interest rates than federal loans. The flexibility of private loans is another benefit, as you can choose the loan amount you need and select a repayment plan that works best for your financial situation. Some lenders even offer interest-only payments while your child is in school, and you may have the option to defer payments until after graduation.

Private loans give you more control over the terms of the loan, including how much you want to borrow. Depending on the lender, you can also explore options for co-signer release, meaning once your child is able to make payments independently, you can be removed from the loan.

Choosing the Best Option for Your Family

When it comes to choosing between private student loans and a Parent PLUS loan, there are several factors to consider. Private loans tend to be the best option if you’re looking for lower interest rates and more flexibility in terms and payments. If you have a good credit score, you can often secure rates that are far more competitive than what federal loans offer.

However, if you’re looking for a straightforward loan with fixed terms, a Parent PLUS loan may still be the better fit, especially if you’re uncomfortable with the risks of co-signing a loan.

🎓Bonus Tip: Always check if the lender offers a co-signer release option, so that you can eventually remove yourself from the loan once your child is financially stable enough to handle the payments on their own.

In the end, it’s about finding a balance that works for you. Consider interest rates, repayment flexibility, and loan terms before making your decision. Taking the time to compare private lenders and weighing them against the federal options can save you significant amounts of money in the long run.

Choosing the right student loan option isn’t just about what your child needs—it’s about what makes sense for your family’s finances. You’ve got this, and with the right planning, your child’s educational journey can be just the beginning of an exciting future!