Parents of high school seniors tend to spend the year in a state of stress. Your child’s college choices have a huge effect on their future. But for the first time, it’s more their choice than yours. What do they want to do? Can they afford it? How will you advise them? One vital question you might worry about is whether or not they should take out loans to pay for college. While college loans can open doors your child could never afford otherwise, they also have long-term consequences. When is it worth it?
Benefits of Student Loans
The most obvious benefit of student loans for your child is a college education they might not be able to afford otherwise. While it’s better to pay cash for things than to go into debt, many parents simply don’t have the savings it would take. Student loans are considered “good debt,” that is, debt that will ultimately pay off. With their degree, your child will have an easier time paying for the costs of college than they could have without it.
Your child won’t have to pay for the loan until they’re out of school. And, if it’s a federal loan, they may be eligible for income-based repayment or student loan forgiveness. Paying the loan can help them build credit.
Student loans can open a lot of doors for lower-income students. Instead of simply getting a low-paying job out of high school, a student from a working-class family can go to college. With the higher income they’ll have after graduation, hopefully they will have no problem paying the debt.
Disadvantages of Student Loans
There’s no way to get around it: when you borrow money, you end up paying more in the long run. Interest stacks up, and if your child has to defer payments due to low income, the loan amount can skyrocket. Some students never finish college and are stuck trying to handle high loan amounts on a minimum-wage job. Others do finish, but the degree isn’t as lucrative as they thought, or they can’t find a job in their field. A large proportion of students end up regretting taking on their loans.
Student loans cannot be discharged through bankruptcy, and loan forgiveness is far from assured for anyone. Unpaid loans can harm your child’s credit and keep them from building up any savings.
For this reason, it’s always wiser to exhaust other options before borrowing. Your child should apply for student aid and all the scholarships they can. You also need to have a conversation with them about the cost of college, their options, and what loan payments might come to. Look at the actual number a monthly payment would be, and compare that to the salary of an entry-level job. Show them sample budgets so they understand just how much it will be.
They may need to set their sights on a state school instead of a private or Ivy League school. In the long run, a degree is a degree. No matter how shiny the brochures or how much fun your child had at their school tour, it doesn’t make sense to go deeply into debt for an experience that won’t pay off.
Student Loan Options
Since you’re around to help your child pay for college, you might wonder if you can get them a better student loan deal than they can get on their own. After all, they don’t have credit or assets and you likely do. The answer is that you can, in several different ways. However, these might not be a good idea in your situation.
The first possibility is called a Parent PLUS loan. This federal loan is in your name, for your child’s education. The downside, though, is that it may not be eligible for all the same types of assistance that may be available for a federal loan in your child’s name. It also won’t build your child’s credit.
Another option is to cosign on a private loan for your student. This may get them better terms. But remember, that loan is then your legal responsibility. If they default, you’ll get the penalty, including garnishment of your Social Security payments during your retirement. How responsible is your child? And how willing are you to take over the loan if they don’t pay what they agreed?
Last, you can get a home equity loan, also called a second mortgage. By using your home as collateral, you can get better terms than most other loans. The downside? Your home is the collateral! What will happen if your child drops out of college and can’t pay the loan? You’ll then have to pay both it and your original mortgage, or risk losing your home.
What’s left? A federal loan in your student’s name may end up being the most sensible choice, especially if they qualify for a subsidized loan. But read all terms of your child’s loan and counsel them on whether it looks manageable.
Get Sound Advice
Your child is fortunate to have you to give them wise advice at this turning point in their life. But where do you go when you need advice? Some student loan information can be hard to digest, and the loan companies may not have your best interest at heart. Before signing on the dotted line, talk to a skilled professional whose duty is to you, not a company that wants your business. To find an experienced and ethical financial advisor, contact us today.
