While filling out the Free Application for Federal Student Aid (FAFSA) and having your child apply for scholarships should be your first line of defense when funding your child’s education, there still might be a gap in coverage.
The average cost of college continues to increase (up to $33,480 a year for a four-year private university), meaning more parents have to rely on borrowing private student loans. In fact, a 2017 Sallie Mae report found that 8% of students’ college costs are supported by parent borrowing－that’s in addition to the 23% of college costs funded by parent income and savings.
If you find yourself in a similar boat trying to pay for your child’s education, here’s what you need to know about private parent student loans.
What are private student loans for parents?
To understand what private student loans for parents are, you should know what they are not. They are not federal student loans, which are issued and regulated by the government. Private parent loans for college students are issued by independent lenders such as banks or companies like LendKey.
When taking out private parent student loans, you could fall into two scenarios: Taking a loan out yourself to pay for your child’s college or cosigning a loan. For the latter, your child is considered the primary loanee, but you would have to make payments if they do not.
When should I take out private parent student loans?
Private student loans for parents should be a last resort when trying to finance your child’s education. You should first look into federal aid, grants, and scholarships to cover any costs. If that still doesn’t cover all the costs, then private parent student loans might be an option.
Luckily, you don’t have to worry about application deadlines with private student loans, because you can apply for this kind of loan year-round. This is important especially if your financial situation changes suddenly while your child is partway through a semester.
How much can I borrow?
Every lender has different limitations for how much you can borrow based on factors such as your credit score and debt-to-income ratio. But, in general, lenders let you borrow up to the cost of attendance for private parent loans for college students (minus any financial aid your child receives from other sources).
Other lenders may just have a cap on how much you are allowed to take out in a single academic year (an annual loan limit). Or, they might have what’s called an aggregate loan limit: a cap on how much you can borrow with multiple private student loans combined.
How do I know if I’m eligible for parent private student loans?
Whether you are cosigning a loan for your child or taking out private student loans yourself, lenders will likely be looking for similar criteria. Here are the most common things considered for eligibility:
- Income level: Lenders will want to know how much you make before deciding how much to loan you. Showing a steady income and sufficient funds will make a lender more confident you can make repayments. You will likely have to show your pay stubs and tax returns to determine this number.
- Debt-to-income (DTI) ratio: Not only will the lender look at how much you make, but they’ll also look at how much other debt you have. They calculate your DTI ratio by dividing your gross monthly income by how much you owe in monthly debt. So, you maybe be asked to show documentation for things such as a list of assets and their values, and monthly payments for rent or a mortgage.
- Credit score: While the exact credit score required varies depending on the lender, having good credit will help make you a more desirable loanee. Also, having a better score could help secure better interests rates, so you don’t have to pay as much in total cost.
- Stability: In addition to showing your income, the lender may ask to see your work and residential history. They will look at how often you’ve switched homes and jobs for a certain period to determine your stability. Lenders tend to want someone who they can rely on, and this stability could prove that.
It’s important to remember that eligibility requirements vary by lender. There are still private student loans for parents with bad credit available, for example, but it might come at a higher interest rate.
How does the repayment process work for private parent student loans?
Unlike federal loans, which doesn’t require repayment until your child has graduated or dropped below half-time enrollment status, private student loans repayment terms differ by lender. Also, repayment options are more limited with private student loans; they don’t offer options such as income-driven repayment plans. You’ll likely fall into one of several scenarios whether you are a private parent student loan borrower:
- Pay upon disbursement: The lender might ask you to start making payments on both the principal and interest while your child is still in school.
- Make interest-only payments: A loan might stipulate that you have to make interest payments while your child is still in school.
- Grace period: This means you’ll only start paying back the loan after your child graduates or drops below half-time enrollment.
Repayment terms vary by lender ranging from five years to over 20 years. That’s why it’s important to research your lender’s options to make sure you can keep up with the repayment schedule while trying to reduce your debt. The longer you make payments, the more likely you’ll pay more overall due to interest.
What are the pros and cons of taking out private student loans for parents?
Before borrowing any money for your child’s education through parent private student loans, here’s a summary of pros and cons to consider.
- You could have a better interest rate: With a federal student loan, you will have to pay the 7.00% interest rate for a Parent PLUS Loan. With private parent student loans, you could find interest rates starting around 3.00% APR if you’re eligible, meaning you could save money in the long run.
- You might avoid an origination fee: With Parent PLUS Loans, you have to pay an origination fee of over 4.00%. Most private loans don’t have that requirement. But even if they do, they’re usually based on your credit, meaning you could still have a lower fee if your credit score is higher.
- Your credit could be damaged: Unfortunately, if you don’t make payments, your credit score could be lowered. This could prevent you from achieving your other financial goals such as buying a home.
- Lenders might have variable interest rates: Federal loans have fixed rates, while private student loans can have both fixed and variable interest rates. With a variable rate, you could start with a low percentage, but it could increase later. This means your monthly payments might increase and you could pay more for the loan overall.
- There aren’t as many repayment alternatives: With federal loans, there are some repayment options including income-driven programs. Private parent loans, however, don’t have that flexibility.
What role does my child play in a private parent student loan?
If you take out a private parent student loan, your child’s only requirement is to stay in school. If they drop out early, the money not used needs to be returned and repayments on the remaining amount must be repaid in the period stipulated by the lender.
It’s essential that you fully understand what you’re getting into when borrowing a private student loan for your child. That’s why it’s always best to shop around for private parent student loans to find the best option for your personal situation.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.23% – 13.23%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 10.11%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|