Parents! Don’t Let Student Debt Hold Back Your Retirement
It’s no secret to most parents today that college is expensive — or that the cost of the average college degree is only increasing. What may surprise parents, however, is that their children’s student debt can have a major impact on their own financial health — including their credit score and even their ability to retire.
There are many reasons why student debt may push off retirement for parents. The two primary causes are federal student loans that parents may take out in their own names to fund their kids’ college education, known as Parent PLUS loans, and private student loans that parents cosign for their children. This article explores the ways that these loans can impact parents’ financial health — and how you can avoid being caught in this trap.
Parent PLUS Loans
For parents of undergraduate students enrolled at least half-time at eligible schools, the United States Department of Education offers a specific type of loan designed to help close the gap between savings, scholarships, grants and other types of financial aid. Known as Parent PLUS loans, this type of student loan is taken out directly by parents of students. The loans are offered at a fixed interest rate that is typically higher than other types of federal student loans. The fees associated with Parent PLUS loans are also higher than for other federal student loans that are taken out by students.
When parents take out PLUS loans, they are responsible for repaying the loans themselves, which can be a heavy burden for many borrowers as they approach retirement. Many benefits of federal student loans are unavailable for Parent PLUS loans, such as income-based repayment options. Additionally, because the loans are taken out in the parents’ name, the loans cannot be consolidated with the students’ loans, making the parents solely responsible for the loans.
Cosigning Private Student Loans
Instead of taking out Parent PLUS loans, many borrowers instead turn to private student loans. While these loans offer an alternative to the sometimes higher interest rates of Parent PLUS loans, it typically comes with a significant drawback: the requirement of a cosigner.
Private student loans are approved on the basis of creditworthiness. Since most students are relatively young and do not have an established credit history, they will not qualify for a private student loan on their own. A cosigner with a strong credit score — typically a parent, grandparent or close friend or family member — is generally required to become eligible for the loan. The cosigner will become responsible for the loan in the event that the primary borrower does not make the payments or defaults on the loan. The loan is then approved, usually at a lower interest rate based on the cosigner’s credit history.
As cosigners, parents take the substantial risk of assuming their child’s entire student loan debt if he or she cannot make the payments for some reason. This could be due to unemployment, irresponsibility, or even death or disability. Depending on the lender, if a borrower goes into default, the entire amount may even become due at once, putting a parent in a precarious financial position. If a parent cosigns a student loan, she should be aware that she could become liable for the entire amount of the debt. If you are looking to avoid this pitfall, you can look into student loans that don’t require a cosigner for your child.
Avoiding the Burden of Student Loan Debt as a Parent
Student debt can make it difficult to retire on time — and can make it next to impossible to put away enough money for retirement. Making smart choices about student loans can help prevent this from happening to you.
First, avoid taking out Parent PLUS loans unless all other options have been exhausted. Parent PLUS loans have higher interest rates and fees than other types of student loans, and less generous repayment options. If you and your child are considering PLUS loans, a direct PLUS loan taken out in your child’s name may be the better choice.
Second, if your child will need to take out private student loans for college, start planning in advance to build up his or her credit score. Make your child an authorized user on your credit card, or help him take out a small loan to purchase a car or other consumer good. By establishing a good credit history, you may be able to avoid the need for a cosigner. If you are required to cosign a loan, talk to your child about obtaining a cosigner release. Once your child makes a certain number of on-time payments and has a certain income level and credit score, he or she can often have you removed as a cosigner. This will remove the burden of the debt from your shoulders in the event that your child is unable to pay.
Third, consider less expensive college options. A great education does not have to mean going into substantial debt — or compromising your retirement. By working with your child and making smart choices, you can help your child get a degree and still save for your own future.
Drew Cloud started The Student Loan Report when we found it difficult to find student loan news and information in one place. In his free time, you can find Drew playing basketball, reading other blogs, or playing with his Great Dane named Rudy.