Should I Borrow Money to Pay for My Kid's College Education?

Consider these options to limit your family's financial risk.

Preparing for college is an exciting time for both students and parents. But trying to figure out the best way to pay for that expensive college degree can put a damper on the festivities.

According to The College Board's "Trends in College Pricing(opens in a new tab)," the average cost for one year of tuition, room and board at a 4-year in-state school was $21,370 for the 2018-2019 school year. The same cost for a year at a private nonprofit 4-year school was $48,510.

With costs continuing to rise, you may be wondering how it's possible to pay for your child's education. If you don't have enough money in a savings plan, you'll likely be looking at loans. But what is your level of responsibility?

Helping your kids with their college expenses is generous, but it may put your financial security and retirement at risk. Once you know how much you can afford and your options, you'll be better equipped to provide aid to your student.

Options for parent loans

Parents have three main borrowing options for college—a federal Parent PLUS loan, private loans or a home equity loan. If you decide to take out a loan for your child's college, you'll need to choose between these options.

1. Parent PLUS loan

With a Parent PLUS loan, you can borrow as much as you need, and you'll have a loan with a fixed interest rate and flexible repayment options. However, Parent PLUS loans have the highest interest rate of any federal student loan available. Plus, they come with an origination fee, and you must start paying them back immediately, unlike some other student loans.

2. Private loan

If you can qualify for a low-interest private loan, it may be a better option. The downside is that private loans usually don't have flexible repayment plans, so if you lose your job or run into another financial hardship, you'll still be on the hook.

3. Home equity

A third option is using your home equity for a loan. These are easy to qualify for and have a fixed interest rate. However, the repayment plan isn't flexible, and if you default on the loan, you could lose your house.

Can I afford to take out a loan?

The answer to this question depends on several factors. First, you need to determine how much money you need. Most schools have an online net price calculator that you can use to estimate your out-of-pocket expenses. Focusing on schools that are within your price range will be helpful. If you already have a college savings plan, you'll have more freedom.

Once you've estimated how much money you need, consider whether you're on track for your retirement. You can use a retirement calculator to help. It's important that you don't take money from your retirement plan or slow down your retirement savings to pay for your child's college. If you fall short in retirement, you may end up relying on your kids.

If you don't already have savings and aren't in a comfortable place to retire, taking out a student loan is a bad idea. You'll likely end up going into retirement with debt and having to pay it off on a fixed income. If your kids take out loans instead, they'll have their entire adult lives to pay it back, plus a higher earning potential to do it with.

Alternative ways to help your kids

So what can you do if you've decided to not take out a loan for your child's education? While it's not your responsibility to take on college debt, you should help your kids navigate applying for loans and make good financial decisions. This process can start while they're teenagers and continue into adulthood.

In high school

While your children are still in high school, help them make a plan to graduate debt-free. One idea is to sign up for AP or IB classes or to dual enroll at a local community college to knock out some college credits before college even starts. Every high school offers different options.

You'll also want to meet with the school guidance counselor, who can tell you more about scholarships, grants and financial aid and help your child fill out the Free Application for Federal Student Aid(opens in a new tab).

Applying for student loans

Once your child has maximized these options, begin looking at student loans. Start with a federal student loan, which will have a fixed interest rate and flexible payment options. The terms will usually be better than the Parent PLUS loan. If your child qualifies for a subsidized loan, this is especially helpful since the government will pay interest on the loan until the student has graduated.

Most federal loans have borrowing limits, and if you find that your child still needs more, look into private loans. Keep in mind that loans should ideally take only 10 percent of your income, so if your student is applying for the loan, they should estimate predicted income upon graduation. Private loans should be your child's last resort because many private loans have adjustable interest rates and don't offer flexible payment options such as deferment.

In college

Once your kids start college, encourage them to start a part-time job. This will provide some income to start paying student loans.  Also, if you haven't already, teach your kid how to make a budget. This will help them plan for spending, saving and paying their loans and will set them up for good financial decisions in the future.

After college

Once your kids graduate college, help them review the repayment terms of their loans. Talk about income-driven repayment plans and explain options for pausing payments on federal loans if necessary. Also help them understand whether they will qualify for loan forgiveness and how to apply for it.

Related: 5 Ways to Lower Your Student Loan Payment

Teaching money management skills

It's important that you don't sacrifice your retirement for the sake of your children's education. Otherwise, your children may end up having to support you, and you won't have done them any favors. Instead, teach your kids how to manage money so that, even if they do have student loans, they'll be financially responsible and able to pay them off.

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