SAN JOSE, California, June 22, 2021 / PRNewswire / – As a parent, the desire to help your children is innate, so it’s understandable that you want to help pay for their education by taking out student loans for parents. But borrowing money to help your child complete school can put a strain on your financial well-being, as well as your future financial security.
In fact, the federal government estimates that more than one in eight parents will default on their Parent PLUS loans. If you are considering taking out student loans for parents, here are five key considerations to keep in mind before you pull the trigger.
For more information on loans and credit, visit the myFICO blog at https://www.myfico.com/credit-education/blog
1. It will have an impact on your credit
Almost every time you apply for credit, the lender does a thorough investigation of one or more of your credit reports. If you are applying for private student loans on behalf of your child, the hard investigation may impact your FICOÂ® Scores. Although Parent PLUS loans from the Department of Education require a credit check to make sure you do not have an adverse credit history, it is just a sweet inquiry and will not affect your FICO score.
Another thing to consider is that adding a new credit account to your credit report can impact your credit history by affecting the amount of debt you owe and the average age of your credit accounts. credit. If you miss a payment within 30 days or more, it could damage your FICOÂ® Scores significantly. And if you default on the debt, it could take years to recover.
2. It will increase your debt to income ratio
Your debt-to-income ratio (DTI) is not included in your FICOÂ® Scores, but this is an important factor that lenders can take into account when applying for credit. This is especially true for mortgages. Your DTI is calculated by dividing the total amount you pay for your debt obligations each month by your gross monthly income.
For example, if you have $ 1,000 the value of debt payments and your gross monthly income is $ 4000, your DTI is 25%.
When you add student loans for parents to your credit report, the monthly payment may be considered when you apply for a loan. If you are hoping to buy a house, this could reduce the amount you can borrow because mortgage lenders try to keep the total DTI of your existing debt and the new mortgage at 43% and below.
In other words, taking out student loans for parents could affect your ability to get credit when you need it on your own.
3. It will be more difficult to save for retirement
the U.S. Government Accountability Office found that nearly half of Americans aged 55 and older have no retirement savings. If you think you’ve fallen behind on your retirement plan, taking out student parent loans will only make it harder to catch up.
While it may seem selfish to some to focus on their own future rather than that of their children, it is important to note that while there are many financing options for students, there are no student loans. low interest rate pensions available to their parents.
If you sacrifice your pension plan borrow on behalf of your college-aged son or daughter, it could mean living on less than an amount you are comfortable with, working longer, or ultimately depending on your kids for a financial support.
4. Loans to parents are more expensive
For the 2020-21 school year, Parent PLUS loans have an interest rate of 5.3%, along with a loan fee of 4.228%, which is deducted from the loan proceeds. In contrast, undergraduate loans carry an interest rate of 2.75% and a loan fee of 1.057%.
If you are borrowing from a private lender, you can usually avoid an upfront loan fee, but the interest rate will depend on your credit and financial situation. Even with stellar credit, however, it will likely be difficult to beat the terms of federal undergraduate student loans.
Additionally, if your family demonstrates financial need, your child may be eligible for subsidized student loans. With these loans, the government pays the interest while your child is in school, as well as during future deferrals.
Of course, parent loans also allow you to borrow more than your child can afford through the Department of Education. But if they can get enough to cover their education expenses, the terms are much more favorable if they take out loans.
5. He Can be difficult transfer the debt to your child
Some parents may take out student loans with the intention of transferring the debt to their child after they graduate. And although some student loan refinancing companies allow it, your child will need to be able to meet the lender’s eligibility criteria to transfer the debt.
Although there are a few exceptions, most recent college graduates probably don’t have a strong credit history, the transfer of this burden could therefore take years. And if your child doesn’t agree to take on the debt, you’re stuck with it because it’s in your name.
To compromise, you may be able to ask your child to pay off your loans, but the debt will still show up on your credit reports and affect you in other ways.
The bottom line
There is nothing wrong with wanting to help your child financially while they are in college. But before you do, it’s important to consider how the decision to take out student loans for parents may affect you. In many cases, it may be best to encourage your child to apply for federal financial assistance on their own.
One way to help without jeopardizing your future financial security is to open and contribute to a 529 Education Savings Plan. Funds in this type of account grow tax-free and there is no tax on withdrawals as long as you use them for qualifying educational expenses. Additionally, some states offer tax deductions or credits on initial contributions.
Alternatively, you can provide a modest allowance to help your child cover certain living expenses that do not fall under approved uses for federal student loans. You can also help your child find scholarships they can apply for and choose a more affordable school.
The important thing is that you take the time to understand how parent student loans might affect you, and look for alternatives that can help your child get the financing they need without shifting the burden to you.
myFICO makes it easier to understand your credit with FICOÂ® Scores, credit reports and alerts from the 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do the FICO scores. For more information visit https://www.myfico.com.