I read the story the other day of a woman who had taken out $33,000 in parent loans to help her daughter get through college. Her payments were $800 a month and she figured she’d be into her 70s before she got them all paid off. If you have a child whose college bound next fall, you’ll soon be getting financial aid letters if you haven’t gotten them already. If you’ve haven’t been able to save much for your child’s college, it will be tempting to apply for loans. But before you do this, here are some things to think about.
A good rule of thumb
A good rule of thumb is to never borrow more money than you feel you could pay back in 10 years or before you retire. You don’t want to give short shrift to your retirement savings or you could be in a world of hurt by the time you reach your 70s.
Exhaust other alternatives
Most financial experts and advisers say that you should exhaust all your other options before taking out a parent loan. The reason for this is because these loans generally come with costlier terms and loans for your children. They typically have looser borrowing limits, which can lead you to taking on more debt than you can really afford.
If you can’t cover college costs
If you must borrow money to help your child get through college, you should first borrow the maximum amount you can in federal direct student loans as these have better interest rates. If you have equity in your home, a less expensive option might be a home equity line of credit. If you have good credit, you could probably get one with an interest rate of about 3.5%. Plus, that interest is tax deductible. And this certainly compares favorably with a parent loan that could have an interest rate as high as 7.49%.
It’s also important to keep in mind that Plus (parent) loans offer less flexibility in repayment plans than do federal direct undergraduate loans. In fact, if your child finances some of his or her education with one of these loans, they will have a number of options for repaying them or even changing their repayment plans.
Have your child start at community college
Many parents today are requiring their children to spend their first two years at community colleges. These cost less for intuition and there would be no charges for room and board as the child is still living at home. The first two years of college consist mostly of required or basic classes. Your child could take them at a community college just as easily as at a four-year state university and for a fraction of the cost.
Should your child even go to a four-year college?
While it’s true that a four-year college degree can help a person earn more money during his or her lifetime, it has to be the right degree. A degree in the hard sciences or engineering should definitely help a person get a job and earn more money. However, degrees in women’s studies, psychology, sociology and the like – probably not. In fact, if your child graduates with a bachelor’s degree in psychology, he or she is unlikely to ever get a job in that field. There are many occupations, especially in the healthcare field, that require only two years of schooling but that pay well and lead to very rewarding careers.
Have a plan
Most important of all is to sit down before your child starts college and make a plan for how you will finance his or her education. You might decide on a combination of community college and state university or a combination of a homeowner’s equity line of credit with a student loan. You might combine a Plus loan with a privately backed loan (instead of a federally-backed loan) or you might even be able to find a completely different source of funds. But the important thing is to have a plan so you will know how you will be able to finance your child’s education without putting yourself in a huge bind that will last for years.