The cost of college has continued to rise over the years. To help their children pay for school, parents are increasingly taking out student loans. According to the Office of Federal Student Aid, over 3.5 million people took out Parent PLUS Loans in 2017.
Although it’s understandable that you want to help your children fund their education, taking out parent student loans is a big risk. To keep up with the payments, you might have to make sacrifices that can have long-term consequences on your finances.
3 reasons you should reconsider parent student loans
As a parent, you want the best for your child. That includes a quality education. With so many nightmare stories about kids graduating thousands of dollars in debt and unable to afford their payments, it’s natural that you want to take on some of the burden yourself. However, doing so can have a serious and long-lasting effect.
Here are three ways parent student loans can hurt you.
1. You might have to delay retirement
When you take out any parent student loans, you might have to make some tradeoffs to afford the payments. That approach can mean sacrificing your retirement planning.
According to a Student Loan Hero survey, nearly 30% of parents said they withdrew from their retirement savings to help cover student loan payments. By doing so, you lose out twice; you will have to pay penalties for withdrawing from your retirement fund early and you miss out on your investment’s growth.
Even if you don’t withdraw money from your account, but instead cut back on your monthly contributions, you’ll end up shortchanging your retirement fund.
Keep in mind that if you don’t help your child pay for school, that doesn’t mean they won’t be able to get a degree. There are other options available to them, including grants, scholarships, and student loans.
However, there aren’t alternatives available for funding your retirement. Prioritizing your financial health is important for your well-being.
2. You might not qualify for other types of debt
When you take out student loans as a parent, you raise your debt-to-income ratio. Having student loans under your name can hurt you when you try to make other large purchases, such as buying a home or a car. With more debt and a regular monthly payment, you might struggle to get approved for a loan, or you might have to pay higher interest rates.
If you’re trying to move to reduce your living expenses or buy a more fuel-efficient car, student loans can get in the way of meeting your goals.
3. You’re obligated to repay the debt
Applying for parent student loans is a huge decision. When you take out a loan, you’re responsible for making payments on those loans even if you experience major life changes.
For example, if your child drops out of school, is unable to find a job after college, or you lose your job, you still have to repay the loan.
When it comes to private student loans, you could be on the hook for the loans even in times of tragedy. There have been cases where parents had to repay student loans even after their children passed away.
Unlike other forms of debt, student loans are typically not eligible for discharge in bankruptcy. Even if your financial life is in ruins, you can’t get rid of student loans like you could with credit cards or car loans.
How you can help your child without going into debt
It’s important that you don’t feel guilty about not taking out student loans for your child’s education. There are still ways you can help pay for college without risking your own financial health, such as:
1. Help them complete the Free Application for Federal Student Aid: The Free Application for Federal Student Aid (FAFSA) is an important tool for accessing federal student aid. Beyond student loans, your child might qualify for grants and work-study programs which can help them reduce their college costs.
2. Research grants and scholarships: There are thousands of grants and scholarships available to help your child pay for school. Your child can apply for and receive multiple grants and scholarships, reducing how much they need to borrow for school.
3. Compare the cost of schools: When deciding where to go to school, sit down with your child and help them compare the cost of each college. For example, pointing out how much a public school costs compared to a private school — a year at a public school costs an average of $9,650 while a private school costs a staggering $33,480 — can empower them with the knowledge they need to make an informed decision.
Protecting your future
Although you want to help your child, taking out parent student loans isn’t always the answer. If you know your options, you can help your child pay for school without putting your future at risk.
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