No parent wants to consider the ramifications of his child leaving college with a huge burden of student debt, yet few have the funds to pay their child’s way in entirety. To reduce the expenses of college it pays to start searching early for scholarships and grants, and never overlook the all important FAFSA application which will enable your student to apply for a low interest federal loan.
Obtaining a degree can be horrendously expensive, so make sure this is something your student really wants to do, as loans still need to be honored even if the student fails to complete his college education. Encourage him to think about his future plans after college and if the amount of debt he may need to take on is something which can be realistically paid off in his anticipated career. It is always worth investigating the types of career paths which will lead to student loan forgiveness or programs such as the Peace Corps or AmeriCorps as a way of reducing student loan debt on graduation.
When the FAFSA is submitted, an expected contribution from the parents is assessed, and some colleges also expect a contribution from the student. If funding is tight there may be the chance that your child will qualify for a federal Stafford subsidized student loan, which means that no interest is due until six months after graduation. There is also the unsubsidized Stafford loan at a low rate of interest.
Federal student loans are not subject to credit checks and should be utilized as the first source of borrowing, unless you can locate a suitable interest free student loan program. These are usually awarded on both a needs and merit basis and offered by private institutions.
If there is a funding shortfall after federal student loans have been utilized, parents have the option of taking a federal PLUS loan out themselves. This loan is credit checked and issued to the parents directly, and is non transferable, thus the parents assume the full responsibility for the loan until it is paid off in full. The interest rate is higher than that available on the direct student loans but is less than that on private student loans.
If a private student loan is necessitated to make up for any shortfall, then it is likely the parent will be asked to stand as guarantor for the loan, and co-sign it. This is because most young students have not had the opportunity to establish a credit history of their own, and no private lender will offer an unsecured loan without some form of guarantee. It is very important to understand the full ramifications of co-signing a student loan, as it can affect your credit history if your student is remiss with any payments.
The best advice to parents regarding student loans is to search for as many options as you can early on to reduce the necessity of too much borrowing. Many colleges offer excellent financial aid packages which are based on need, and should be explored as a valid option. Utilize scholarships, grants, interest-free loans and then federal loans, and only use private student loans as a last option.
If your student is going to be taking on loans, then educate him as much as possible about budgeting to make their loans stretch and the importance of living within their means. This can reduce the risk of debt becoming unmanageable upon graduation and be a vital aid as he manages his own finances for the first time.