You are 51. Your son or daughter has just graduated from college. That’s good news, but not if you are stuck with college debt, too. As an example, if you have taken a $33,000 loan out to help pay for college, you may now be facing an $800 per month payment for 20 years!
The trap begins with acceptance letters. Your son is accepted to his dream school. But, his and your savings along with financial aid do not cover the total cost. Of course, you are tempted to help out, $10,000 here and there over the next four years. So you borrow.
Many parents take out Plus loans, available through the federal government. The average yearly loan from Plus is $33,000. But, these loans are not as good as student loans offered by the federal government.
Here are some comparisons:
• Student loan rates are 3.4% to 6.8%, but Plus loan rates for parents stand at 7.9%.
• These interest rates and payments begin immediately, while student loans are not payable until graduation.
• Plus loans have an origination fee while student loans do not. That fee is 4%, or to borrow $4,000, it would cost you $400 upfront.
• If a student has trouble paying back the loans, there are ways to configure the debt so it is manageable. There is not much flexibility for the repayment of Plus loans for parents.
What is a parent to do?
Here are some suggestions for making the decision about when to help, how much to help, and when not to help.
• Parents should not take out loans until they have exhausted all other possibilities!
• If it is a must to take out a loan, check out all options.
1. Consider taking out a federal direct student loan for dependent students. You can borrow through your daughter $5,500 up to $7,500 annually.
2. Check out a home equity loan. You can get such loans for a rate as little as a 3% and can deduct the interest from your taxes.
3. Look into state-related funding. You can get better rates than through a Plus loan (as low as 5.9%), and they often have lower or no origination fees.
• Consider your future as well as your son’s or daughter’s.
1. Remember, your son or daughter may want to help you pay back these loans, but he may not find a job or one that pays enough to cover both yours and her debt.
2. Understand that your retirement savings are more important than funding the education of your child.
3. Never borrow more than you can reasonably pay back in a 10 year period.