Ask Money

Parent loans for college

Chris Farrell Nov 4, 2011

Question: My son has been accepted to a good out of state private college after completing his 2 year degree at a local community college. However, the financial aid package that the college is offering is at the same rate as he was offered for attending the community college. That is to say, no “free money” about 25% the cost of tuition and fees in Subsidized and Unsubsidized Federal loans and the balance (about 25,000 per year ) in Parent loans. The parent loan carries and interest rate of over 7%, significantly higher than a student Federal Loan.

The other option might be to go with a variable rate Private loan that could fluctuate from 2.5 to 10% depending on Prime. Of course as the Parent I am concerned with what the additional debt will do to my Credit rating, and future retirement status, but I am willing to do what I need to help him through his last 2 1/2 years of college. Are there advantages to taking a higher rate fixed Federal loan program rather than shopping for a lower rate on the private loan market? Kristine, Eagan, MN

Answer: I would forget about the lure of lower interest rates that come with private student loan. The interest rate savings isn’t worth losing the repayment flexibility that comes with federal Parent Plus loans.

What’s more, over the next 10 years, say, the variable rate could turn out to be the expensive option depending on what happens to the overall interest rate environment.

Still, my main reason for preferring the federal Plus loan option is flexibility. You can pay back a federal Plus loan a number of different ways, depending on your financial circumstances.

The standard repayment is a fixed amount each month until your loan is paid off. The minimum payment is $50 and you have up to 10 years to repay it. However, you could choose the extended repayment option with a 25 year pay back term. The graduated repayment plan starts low and adjusts upwards every two years. Under certain circumstances you could even defer payments or put the loan into forbearance.

You can get information about Plus loans here and here.

In sharp contrast, a private student loan is really a straight forward consumer loan with a different label attached to it. You have to meet those monthly payments no matter what.

One other thought: I understand your desire to help out your son. I applaud it. However, I would encourage your son to borrow more in federal student loans if he can. You can always help him pay them off after he graduates. But if he lands a good job with decent earnings once he’s gotten his diploma–it does happen even in this economy!–then he can afford to repay more of the loans and you can worry less about your retirement income. .

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