It is no secret that college is expensive. More and more parents are taking on loans to help their student pay the bills.
It is, however, important that parents know their options and limitations so Carl Carlson, CEO of Carlson Financial, shared some tips.
If you have a child going to college this year or already have children in college you may be wondering, "How do people pay for it?"
At this point, students know what their financial aid package is and whether they have any scholarships or grants. They should know how much they will have left to pay.
Students are capped on what they can take out in federal student loans, between $5500-$7500 per year, depending on what year they are in. Often, students are still left with a balance after hitting those caps, and parents are borrowing to make up the difference, Carlson said.
Parents need to know the difference between the loans the students are taking out and the loans the parents are taking out.
Carlson said many parents tap sources they already have like retirement accounts, credit cards or even their home equity. None of those are good options, Carlson said.
If they take out a Parent PLUS loan, the most common type of federal loan for parents, the interest rate is significantly higher than the student’s interest rate on Federal loans: 7.6% vs 5% on the student’s Federal loan, which is high.
While the student is capped on what they can borrow, the parent is not, and many parents are taking out loans for multiple children. The average PLUS loan balance is almost $26,000.
So, what can parents with college-age children do to help get them through college?
Carlson said the first step is to try and negotiate your financial aid offer. About a third of appeals to financial aid are approved.
Next, compare different loan options. While federal loans do have their benefits, it’s worth looking at the interest rate you could get on a private loan.
Third, don’t wait to start paying the loan back. Even if it’s just $25-50 per month, getting started will save money in the long run.