How will a Parent's Financial Troubles Affect the Student's Eligibility for Student Loans?
May 07, 2012
Like the Stafford and Perkins loans, Parent PLUS loans are borrowed through the student’s college. Ask the college’s financial aid administrator about how to obtain Parent PLUS loans.
If the parents are divorced, either or both parents can borrow from the Parent PLUS loan, so long as the combined total borrowed does not exceed the annual loan limit. Stepparents may also borrow from the Parent PLUS loan program while they are married to the student’s parent.
If the parent does not qualify for a Parent PLUS loan, the student will be eligible for higher unsubsidized Stafford loan limits. These are the same limits available to independent students. The annual loan limits start at $9,500 for college freshmen and increase to $12,500 for college seniors. Note that if one parent is denied a Parent PLUS loan but the other parent is approved, the student will not be eligible for the higher unsubsidized Stafford loan limits. So if the parents prefer that the student qualify for the higher unsubsidized Stafford loan limits, only one parent — the parent with the worse credit — should apply for the Parent PLUS loan.
Private student loans are non-federal loans offered by banks and other financial institutions. The terms vary from one lender to the next, but generally are more expensive than federal education loans for all but borrowers with excellent credit. The loans are credit underwritten with stricter guidelines than the Parent PLUS loan. Not only is eligibility based on the credit scores of the borrower and cosigner, but also the interest rates. Borrowers with better credit scores are more likely to be approved and will qualify for lower interest rates. Typically less than 5% of borrowers qualify for a private student loan’s best advertised rate.
More than 90% of new private student loans require a cosigner, typically a parent or other relative. Parents with bad credit are unlikely to qualify as cosigners on private student loans. Parents who are unemployed or self-employed or who have a volatile income history are also unlikely to qualify as cosigners.
Parents need to be careful about cosigning loans. A cosigner does not just enable the borrower to get a loan. A cosigner is a co-borrower, equally obligated to repay the debt. If a parent cosigns a loan, the loan will show up on the parent’s credit history. Late payments and defaults will ruin the credit of both the borrower and cosigner. Lenders will start seeking repayment from the cosigner after the first late payment. The cosigned loan will also affect the cosigner’s access to other credit. For example, if a parent tries to obtain or refinance a mortgage, the cosigned loan will be counted against them as though it were their loan because it really is their loan.
Students and parents should beware of taking on too much debt to pay for the college education. Total student debt at graduation should be less than the student’s expected annual starting salary and ideally a lot less. If total education debt is less than the annual income, the student will be able to repay the loans in about 10 years. Likewise, parents shouldn’t borrow more than they can afford to repay by retirement or in 10 years, whichever is less.