Three approaches to college loans

Paying for college is a big step for anyone. If you’re considering taking on a student loan, you’ll need to decide whether you should shoulder the whole amount, have your child take the responsibility or share the weight together. Take a closer look at the pros and cons of each scenario.

Key takeaways

  • Understand and evaluate the different ways to handle student debt.
  • Weigh the options of having your child take on more debt or borrowing the money yourself.
  • Consider the benefits and responsibilities that come with sharing these important financial decisions.

Before you borrow

Before you decide to take on debt, consider a few ways to lower college costs.

Open or add to a 529 education savings plan

Even if your child has only a few years until college starts, you can still make a dent in his tuition or progress toward paying for his books, meal plans or other college expenses. Every little bit helps, and a 529 savings plan is more flexible than you might think.

Search for scholarships

There may be money available from your community or for your child's intended major. He can help you research and may even learn about scholarships you didn’t know existed — older friends and siblings can be a great resource.

Work for it

Your child can look into the possibility of working part-time to help pay for tuition. Many schools offer work-study jobs to students with financial need. And contributing from his own paycheck may make your child feel more responsible about budgeting.

Explore your options

Research the actual cost of different schools and plan accordingly. Don't forget about the option to spend a couple of years at a reasonably priced community college before transferring to a four-year university.

Ask for more

Contact the college your child has chosen and ask if it’s possible to add more to the financial package they’ve offered. Colleges will sometimes increase aid if parents have less money than it appears on their application. A college also might bump up the aid if your child has a better offer from a different school. It never hurts to ask.

Once you and your child have a realistic idea of how much college will cost, it’s time to decide how to take on the loans and who will be responsible for repaying them.

If you take on the debt to cover college costs, your child can start his adult life without the burden of student loans. But proceed with caution down this path, which could affect your own financial future.

The pros:

  • Federal Parent PLUS Loans, given by the Department of Education, are readily available for qualified families.
  • As a parent, you probably have access to more ways of getting a loan and more sources of credit — including home equity.

The cons:

  • Loan terms aren’t as favorable as student loans, and not easily forgiven.
  • You will be totally responsible for the loan and may have to compromise other important goals, like retirement, in order to pay it off.

By taking on a significant part of his college tuition payment, your child can learn lessons in financial responsibility. Having a stake in his education can also motivate your child to work harder and take his academics more seriously. However, the debt could limit his opportunities after he graduates.

The pros:

  • Federal student loans are easy to get and typically have lower interest rates than private loans.
  • Federal loans can be refinanced later into private loans if you find more favorable terms.
  • Because of the flexible and favorable terms of student loans, it can be better for your child to take on the debt, even if you agree to make the payments for him.
  • Repayment terms include flexible plans or even loan forgiveness under certain conditions.
  • Your child begins to establish a credit history.

The cons:

  • Your child may carry a debt that can affect his financial flexibility in the future. He may have to compromise on his housing situation, transportation or a job choice because of his monthly loan payment.
  • If the student fails to graduate, he'll have a harder time paying off the loan without a degree and the job opportunities that go with it.

There is a middle ground where both you and your child take on debt to fund college. Sharing the costs this way can provide some of the benefits described above, while limiting some possible downsides to both of your financial futures. A financial professional can help you evaluate the amount of debt you can take on in light of your total financial picture.

The pros:

  • Making college borrowing a shared responsibility might prepare your student for handling life after graduation. Both parent and student get some relief from debt.
  • Your child still has the flexibility of student loans.

The cons:

  • You and your child are both on the hook for repayment. That means if one of you is no longer able to pay, the other will be responsible for the entire amount.
  • Your child still starts his adulthood with a student loan, which means he’ll need to figure it into his post-college budget, though he can with the confidence of knowing you’re there to help.
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