Well, it’s that time of the year again. You’ve probably sent your children off to class in the fall and what do you get in return? The inevitable reminder that you are now in debt thanks to the tuition bill. I mean sure, there’s financial aid out there, such as internal and external scholarships, and federal/state grants. However, what happens if that’s not enough to cover full tuition costs?
According to Betsey Mayotte, director of Regulatory Compliance for American Student Assistance, the Department of Education has issued new “draft rules” that can potentially affect the eligibility criteria for Parent Direct Plus loans and graduate loans. This is all being done with the mentality of not loaning out more money than what can be paid back.
So in that case, what are my options? Here’s a few that we think can benefit you depending on your personal needs:
Tuition Payment Plans:
Always try, if possible, to work something out with the university or college that your child is attending. Maybe a payment plan can be drawn up where you can pay the rest of the tuition debt on a monthly basis over the rest of the school year. Taking this route may save you money from interest fees as well as being debt free by the time of graduation. However, there’s always a catch. If you fall past due on your payment which could happen after any unexpected crisis, then your child may not be able to sign up for classes for the next term, or even worse, not receive his or her diploma until the bill has been paid.
So what’s option number two?
The bright side of this option is that there is no limit on the amount of money you can take out for a loan up to the cost of attendance. There is a light credit check, but even if you don’t pass it, you can get an endorser. If your endorser is not “creditworthy” then your child can apply for additional unsubsidized Stafford loans.
So what’s the catch here? Well, you have to look at the big picture. As stated by Mayotte, “A $20,000 loan for freshman year may sound manageable, but multiply that by the number of years you expect your student to be in school and the number of college bound children in the household and suddenly you owe $160,000 in Parent Direct PLUS loans, assuming you only have two children.” This would give rise to a sum of $1,800 a month under a standard 10 year plan. Not to mention, Parent PLUS loans are not eligible for income-based repayment options, unless you consolidate your loans under the Direct Loan program. But even then, for a person with an annual income of $80,000 the monthly payments would still be $1,000/month. This could really poke a hole in your retirement savings.
If you think that your child will pay the loan back to you, remember the loan can never be changed to your child’s name and all deferment options will be based on your situation, not the student’s.
So, is any other option?
Co-signing a Loan:
If you don’t want to take up a loan under your personal name, you can co-sign the loan instead.
Ninety percent of private student loans have cosigners, usually being parents. What many don’t understand is that by co-signing the loan, you are now equally responsible for the debt. Even if all payments are up to date, this can heavily affect your debt-to-income ratio. This could really be harmful to you when trying to refinance your home, buy a car, or involve yourself in anything that has to check your credit and/or income.
The risk is big as Mayotte shares when she relates “As private loans have very few lower payment or other options if the borrower cannot pay, and may not have discharge provisions if the borrower should pass away or become disabled like federal loans have, it can actually be riskier for the parent to co-sign on a private loan than it would be for them to take out the federal PLUS loan under their own name.”
If you end up not having any other option and take out loans, be smart and proactive. If the loan is deferred while at school, try to at least pay off the interest that keeps piling up over time. This could save you thousands! If you can add payments as well, even better! You will be happy you did so as time goes by and you see your friends who didn’t drown in debt. Also, keep in mind that there are always scholarships available at the Common Knowledge Scholarship Foundation. All you have to do is take short and free online quizzes on a wide range of subjects. No essays, applications, or specific GPAs are required. Log on to www.cksf.org today to register with an account and ge