The Treacherous Mountain of Student Debt: Things Every Parent Must Know

It is an extremely proud moment for parents when their child graduates from high school and decides to go to college. In most cases, a college education undeniably results in a successful career and a bright future. However, the worsening student debt crisis is something every parent is concerned about, and the terrifying fact is that most parents are very misinformed about it.

A survey by Student Loan Hero (SLH) discovered that 52% of loan borrowers are under the impression that interest doesn’t accrue while their children are in school, 53% think the payment of student loans is based on their income, and approximately 70% are totally misinformed about student loan forgiveness.

7 Important things every parent must know about student debt

1. Submit your FAFSA as soon as possible

Submitting your Free Application for Student Aid (FAFSA) form early is the first thing you need to concentrate on. Most educational institutions have limited funds and offer financial aid on a ‘first come, first served’ basis. So, ensure that you do not delay the submission of your FAFSA form to the federal government, along with the colleges that your child is looking to get into. Remember, if you get the FAFSA form in late, your child could miss out on some much-needed financial aid. Moreover, you should know that a FAFSA form is also mandatory to qualify for a federal loan.

2. Give preference to federal student loans over private ones

Once the FAFSA has been submitted and acknowledged, you will get to know the types of federal aid that your child is eligible for. If there is a need for you to take out loans, consider federal loans instead of private ones. Federal loans come with many benefits such as lower interest rates, deferment or forbearance options and generous repayment terms. Furthermore, you don’t have to provide a lengthy credit history or a co-signer, as is the case with most private loans. Private loans also have higher interest rates and fewer repayment options.

3. Learn the difference between subsidized and unsubsidized federal loans

Many parents don’t know the difference between subsidized and unsubsidized loans. A subsidized loan is a loan in which the federal government covers the interest while your child is in school. These loans are harder to qualify for because of income requirements. You also need to prove a financial need to be approved for a subsidized loan. On the other hand, an unsubsidized loan can be obtained by anyone irrespective of their income. The amount that you can borrow with an unsubsidized loan is determined by the school your child gets enrolled in, and there are no cuts in interest whatsoever.

4. Understand how a direct PLUS loan works

A PLUS loan, also known as direct PLUS loan, is a federal loan that has specifically been designed to help you support your undergraduate child financially. To be eligible for a PLUS loan, both you and your child have to be US citizens or eligible non-citizens. You need to be the biological or adoptive parent and your child must be enrolled at least half-time at a qualifying educational institution. PLUS loans also require a credit check and the loan can be denied if you have a bad credit history. Currently, a direct PLUS loan offers an interest rate of 7.08% for the 2019-2020 school year.

5. Know the implication of becoming a co-signer of a private loan

As a last resort, if your child needs to take out a private loan, it is most likely that you will have to become a co-signer. By agreeing to co-sign, you become the guarantor of the loan. This means that if your child defaults on payments, you need to make them, otherwise your credit will be adversely affected. If this happens, you might not get approved for other forms of credit in the future. So, you should think carefully before signing on the dotted line, and know what it entails once you do. Ultimately, becoming a co-signer is a big responsibility.

6. Make use of tax benefits on student loans

Student loans do come with certain tax benefits and you should make use of them for some financial relief. On taking out a student loan for your child, you can take a tax deduction for the interest that you pay on it. This applies to private as well as federal loans. The maximum tax deduction is capped at $2500 annually. Moreover, there are income tax credits like the American Opportunity Credit that allow you to claim up to $2500 a year for the first four years of your child’s school life. The Lifetime Learning Credit allows you to claim up to $2000 per tax return.

7. Prioritize yourself first

While its undoubtedly wonderful and noble to financially support your child through college, it is a good idea to take a look at your own financial situation before making any decisions. Your child can get grants, scholarships and even some part-time work to pay for college. There are also many government plans and programs to help your child repay their student loans. The same doesn’t hold true for parents who rely on other forms of credit such as personal loans and credit card debt. Remember, if you fall behind on payments, there is little or no assistance that will come your way. So, always prioritize your own finances first.

To sum it up

A good college education is what every child should aspire towards, and any concerned parent will do everything in their power to provide financial assistance. Being informed and aware about the workings of student debt ensures that the financial burden on both you and your child is minimal. 

If you are still confused about student debt and how to circumvent its adverse effects, get some assistance from top financial advisors today.