Borrowing for Parents: Federal Student Loans
When borrowing for your child's education, parent PLUS loans are an option. They are designed to fill in funding gaps after all other financial aid is awarded. These are federal education loans that have a higher interest rate than loans issued directly to students.
Getting Approved
After filling out the initial FAFSA forms, parents will need to fill out an additional application available on the school site. Unlike other federal loans, there is a credit check involved. However, the required credit standard is pretty minimal. The Department of Education reviews only the two most recent years for adverse credit history. Delinquent debt of $2,085 is allowed without affecting approval.
Extenuating circumstances--such as paying off a debt that was reported on your credit report--can be a reason to contest an unapproved parent PLUS loan application. You can view a full list of reasons to appeal a decision at this link. An endorser, the word the Department of Education uses for a co-signer, can also be added for approval. The endorser is also legally responsible for the money borrowed.
Affording the Payment
Approval doesn’t mean you can afford the payment. You’re approved based on the total cost of attendance--income isn't part of the equation at all. For instance, let’s say the stated cost of attendance for a school is $40,000 annually. Your child already has $15,000 from loans in the student's name, scholarships, and grants. You could borrow $25,000 for that year alone. That’s $100,000 total over the course of four years, before interest is added.
Not sure if you can afford this level of debt? Get help with figuring out how much you need for retirement, etc. by talking to a credit union financial counselor or a financial professional such an accountant or a financial advisor.
And don’t feel guilty if you can’t afford the total your child is expecting you to contribute. It’s very easy to give in to the idea that you should borrow as much as you can to help your kid attend that perceived dream school. Often, though, that expensive school--selected because friends go there or the press is good--may not be the best choice. Review all schools you're considering for affordability and relevance to career goals. Also, compare parent PLUS loans to private loans if you qualify for a lower interest rate. Your child has options for schools; you have options for how much to borrow and which loans to choose.