Data shows that more parents are taking out loans for college funding. We take a look at the pros and cons of different funding sources.
New data shows that student loan growth has slowed in the past several years. And although that sounds good, there’s more to the story.
Student loan balances have hit a plateau in recent years, but it isn’t because college costs are dropping or fewer students are going to college. Rather, it’s because parents are increasingly taking on student debt themselves, says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.
Taking a Loan to Pay for Kids’ College? Read This First
But it’s not necessarily because parents want to shelter their kids from taking on loans. In many cases, it’s because student loans won’t cover the full cost of college. Federal student loan maximums haven’t been updated for a decade and therefore have not kept pace with increasing college costs. Dependent students cannot have more than $31,000 in federal loans in total, and no more than $23,000 of this can be in subsidized loans. This maximum nearly doubles for nondependent undergraduate students ($57,500), and jumps to $138,500 for graduate and professional students ($224,000 for medical school students).
Kantrowitz found that student loan growth has continued to rise among the latter two populations with higher aggregate federal loan limits. By contrast, the average student loan balance for dependent students has been hovering right at the $31,000 limit for years.
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What Does This Mean for Parents? Parents, particularly of those students attending more expensive colleges, have increasingly taken out loans. According to Kantrowitz, parent debt increased significantly for middle- and high-income students (33.4% and 20.2%, respectively), who tend to attend higher cost colleges, but not as much for low-income students (3.2%), who tend to enroll in schools with a lower cost of attendance.
If your student has maxed out Direct subsidized and unsubsidized loans (which have low fixed interest rates of 5.05%) and you need to borrow to make up the difference, we’ll compare the Parent PLUS loan with some other loan sources.
One thing to keep in mind is the impact certain funding sources have on the expected family contribution, which is calculated based on information reported on the Free Application for Federal Student Aid. To maximize aid, you will want to keep this number as low as possible. Avoid funding sources that would be considered income until after you’ve filed your second-year FAFSA. Parent income is counted at 22%-47% on the FAFSA and is reported using prior-prior-year tax information (for the 2018-19 tax year, parents report income from their 2016 tax return).
Parent PLUS Loan A federal Parent PLUS Loan for undergraduate students is available through the Department of Education. You can borrow up to the cost of attendance minus other aid. The interest rate is fixed, currently 7.6% (plus an origination fee) for the 2018-19 school year. You can deduct up to a maximum of $2,500 interest paid for the PLUS loan. This loan has flexible repayment options, and the debt is discharged in the event of disability of the borrower or death of the borrower or student.
The downsides: Parent must not have an adverse credit history. If a parent has an excellent credit rating, a private student loan may have lower interest rates (though always read the terms and conditions; know whether the interest rate is fixed or variable.)
Home Equity Line of Credit Especially if you have good credit, the interest rates on home equity lines of credit can be competitive compared with the federal Plus Loan, which is 7.6% (plus an origination fee of 4.25%) for the 2018-19 school year.
