My 17-year-old daughter is eager to begin college. We have some difficult financial situations to contend with and could use your advice and direction. Her dad and I are divorced. I have poor credit due to excessive debt, and late payments. I am considering a debt settlement plan right now on two of my debts. I have outstanding student loans, and my ex does as well. He is unemployed, and has been for almost two years now but he has good credit (I think!) Because of his unemployment and my financial hardship, both our student loans are in forbearance now. Neither of us can afford to help very much with college expenses. How will our situations affect her ability to get a loan with either/both of us as cosigners? — D.N.
Federal student loans are the best option, because they have the lowest interest rates and the most flexible repayment terms. Federal student loans include the Perkins loan and the Stafford loan, which have fixed interest rates of 5.0% and 6.8%, respectively. A lower interest rate may be available on the subsidized version of the
Stafford loan, which is awarded based on financial need. The Perkins loan is also awarded based on financial need. Eligibility for the unsubsidized Stafford loan is not based on financial need.
Eligibility for federal student loans does not depend on the parent's credit history. These loans don't even depend on the student's credit history.
Most students who enter college immediately after high school have thin or non-existent credit histories, so few would qualify if eligibility for the loans were based on the student's credit history. That's why parents' financial information is required
The government's goal in providing low-cost student loans without regard to the student's credit history is to enable students to enroll in and graduate from college without regard to ability to pay. So long as the student graduates and doesn't borrow too much debt for the degree and major, the student should be able to repay the federal student loans after graduation.
Dependent students are eligible for up to $5,500 in Stafford loans as college freshmen. The annual loan limits increase with each year in school, reaching up to $7,500 as a college senior. The annual limit on the Perkins loan is $5,500 per year for undergraduate students. However, the average Perkins loan amount is about $2,000 per year since the loan funds are limited.
If federal student loans do not provide enough funding, the main alternatives are Parent PLUS loans and private student loans.
The Parent PLUS loan is a federal loan borrowed by parents of undergraduate students. It has a 7.9% interest rate. The annual loan limit on the Parent PLUS loan is up to the full cost of attendance, reduced by the amount of other aid received. Eligibility for the Parent PLUS does not depend on financial need.
However, eligibility for the Parent PLUS loan does depend on the borrower's credit history. The borrower of a Parent PLUS loan must not have an adverse credit history.
If the borrower has had certain derogatory events in their credit history during the last five years or currently has a delinquency of 90 or more days on any debt, the borrower will not qualify for a Parent PLUS loan.
The derogatory events include bankruptcy discharge
, default determination, foreclosure, repossession, tax lien and wage garnishment. The Parent PLUS loan does not depend on credit scores. If a 90-day delinquency is the only reason why a parent is ineligible for the Parent PLUS loan, it is possible for the parent to regain eligibility for the PLUS loan by bringing the delinquent account current.
A parent could also qualify for a Parent PLUS loan by having an endorser cosign the loan. The endorser must not have an adverse credit history.
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, especially parents who are not able to pay for college
. 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.