What do parents need to know about student loan debt? There are several areas to be mindful of, especially if a parent is contemplating acting as a co-signer on a student loan. These range from preventive measures (starting the application process as early as possible) to future planning (the timing of your financial commitment to a child’s student loans).
Student Loan Debt: Planning Counts
Schools and government agencies often have a finite amount of resources available for student grants, scholarships, college tuition loans or funds subsidized by the government, and private loans.
Procrastinating on the paperwork for college winds up costing some applicants dearly in terms of time or money. Apply for the Free Application for Federal Student Aid (FAFSA) as early as the program permits for best results.
Filling out FAFSA early, as advice goes, is fairly obvious but you would be surprised at the number of people who wait a bit too long to get the full measure of financial aid that would otherwise be available if it weren’t for missed deadlines.
Apply For A Federal Student Loan First If Possible
You’ll know your child’s full range of eligibility for federal loans, private loans, college education grants, and other resources. It’s best to apply for the federal options first as these tend to be more student-friendly than private loans and may have more forgiving guidelines and procedures if there are late or missed payments. The interest rates on federal loans will be more competitive and private loans should be viewed more like a last resort.
Seek State Education Benefits
State benefits are offered to a wide range of students. You may be eligible for state college financial aid, grants, tuition payments, or other benefits if the student is the dependent child or spouse of a military member, a member of a First Nations or Native American tribe, a disabled veteran, or the dependent of a disabled veteran, etc.
There are many categories and some states may offer financial aid or tuition assistance if they are studying STEM-related subjects or want degrees in highly technical fields.
Parent Direct Plus Loans
The Parent Direct Plus Loan program is described as a federal loan created for parents who can’t afford to pay for their child’s complete education but wish to relieve the student of the financial burden in whole or in part. These loans are intended for the “biological or adoptive parent” of a child enrolled in a qualifying school for a minimum of part-time attendance.
This program is open to both U.S. Citizens and “eligible non-citizens”. This type of loan requires a credit application and you will be required to complete FAFSA before you can apply for this type of student loan for parents.
Consider Co-Signing On A Student Loan Carefully
Co-signing on a student loan as the parent has some potential pitfalls to avoid, especially where timing of the loan is concerned. Parents actively planning to apply for a major line of credit such as a home loan should consider the timing of their application.
If, for example, you apply for a major loan within the same year as becoming a co-signer on a student loan, you may find your ability to qualify for the new loan compromised.
Why is this? Lenders look at your debt ratio as part of the qualifying criteria for a new loan whether it’s a real estate loan, an auto loan, etc. If you cosign for a student loan, you agree to what some in the mortgage loan industry call “contingent liabilities”.
That means that your potential financial liability as a co-signer will be an added factor in loan approval. Could you be approved for a home loan or car loan even if you are a co-signer on a student loan? Depending on your past credit history, loan repayment history, and other options, the answer may still be yes.
But if you have marginal credit or have made some credit mistakes in the last year to two years, being a co-signer on a student loan may have a different effect on your ability to borrow. Consider your co-signing options carefully before you commit.