When New York City Mayor Bill de Blasio recently remarked that he was exploring financial aid options for his college-bound son, it was a sign of the times.Families from all walks of life are struggling to keep pace with the rising cost of college education, which is a staggering 12 times higher than it was 35 years ago. Today 71% of undergraduates completing their studies have student debt.
De Blasio, who pulls in a $225,000 salary, is part of the growing sector of middle and upper-middle class Americans who are struggling to foot the bill for college education. Now more than ever, many parents are finding that their savings and their kids’ student loans aren’t enough. They need to supplement with other loans in order to cover the cost of college or graduate school.
While many parents are familiar with the federal Parent PLUS loan, that’s not the only option out there. How do Parent PLUS loans compare with other means of financing? Let’s break down the pros and cons of three common loans you can take out to help pay for your child’s education.
1. Parent PLUS Loans
When parents are looking to finance a child’s education, the Direct Parent PLUS loan offered by the Department of Education is often the first place they look. The interest rate for loans disbursed before July 2015 is 7.21% plus a loan origination fee of 4.292%.
*Borrow as much as your child needs up to the cost of education minus any other financial assistance he or she is receiving
*Flexible repayment options including graduated and extended plans
*Deferment and forbearance options
*Lower credit score/history requirements
*One (relatively high) fixed rate for every borrower regardless of creditworthiness
*Hefty origination fee of 4.292%
*Only 10-25 year terms available
*Don’t offer the income-driven repayment plans that come with other federal student loans
*Limited customer service
2. Private Parent Loans
Not all private loans are created alike, so it's important to shop around. Interest rates and terms can vary substantially.
*With good credit, it’s possible to get a lower interest rate than the Parent PLUS loan
*Some lenders, like SoFi, enable you to borrow as much as your child needs up to the cost of education minus any other financial assistance he or she is receiving
*Shorter loan terms may be available
*Can provide added benefits (SoFi, for example, offers one-on-one career coaching for both the parent and the recipient child of the parent loan borrower)
*Some offer variable rate options
*May have enhanced customer service, including weekend hours
*May have origination or prepayment fees (but not always - SoFi loans, for example, do not)
*May not have flexible repayment options. Always read the fine print!
*Don’t typically offer deferment or forbearance (although SoFi does offer the latter)
*Traditional bank lenders often cap the amount you’re allowed to borrow
3. Home Equity Line of Credit (HELOC)
While this has historically been a popular option, with the housing market still recovering, many families have less equity to tap from their homes. Still, it’s worth considering depending on your individual situation.
*Typically offer a relatively low interest rate
*Shorter loan terms may be available
*Interest is often fully tax deductible, unlike student loan and private parent loan interest, which allow a deduction of up to $2,500 a year
*Loan amount depends on how much equity you can tap
*No deferment or forbearance
*Harder to obtain - in fact, some banks have stopped offering them
*Adds years to paying off your mortgage loan
*Your home is on the line - make sure it’s what you want to do
Funding a college education requires financial savvy and a thoughtful strategy. Having all the information up front is the best way to set your child up for success – and make the right decision for your specific situation.
What questions do you have about parent loans? Let me know in the comments section below.
Christina Kramlich is the Co-Head of Marketplace Investments and Investor Relations at SoFi. More broadly, Christina enjoys leveraging her many years of startup and financial industry experience to mentor others in their personal and professional journeys, especially if the journeys are entrepreneurial in nature.
Christina is a registered representative and holds FINRA Series 7, 62, & 63 licenses.