Here’s What You Need to Know About Parent Student Loans

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SAN JOSE, California., June 22, 2021 / PRNewswire / – As a parent, the desire to help your children is innate, so it is understandable if you want to help them pay for college by taking out parental student loans. But borrowing money to help your child graduate from school can seriously affect your financial well-being as well as your financial security in the future.

In fact, the federal government estimates that more than 1 in 8 parents will give up their Parent PLUS loans. If you are considering getting a parental student loan, here are five key points to keep in mind before pulling the trigger.

For more information on loans and credits visit the myFICO blog at https://www.myfico.com/credit-education/blog

1. It will affect your creditworthiness

Almost every time you apply for a loan, the lender carefully checks one or more of your credit reports. If you are applying for private student loans on behalf of your child, a complex request may affect your FICO® Glasses. Although Parent PLUS loans through the Department of Education require a credit check to make sure you do not have an unfavorable credit history, it is just a soft request and will not affect your FICO rating.

Another thing to consider is that adding a new credit account to your credit report can affect your credit history, affecting the size of your debt and the average age of your credit accounts. If you miss a payment for 30 days or more, it could damage your FICO.® Scores significantly. And in the event of a default on debt, recovery can take years.

2. It will increase your debt to income ratio.

Your Debt to Income Ratio (DTI) is not included in your FICO® Estimates, but this is an important factor that lenders can take into account when applying for a loan. This is especially true for mortgage loans. Your DTI is calculated by dividing the total amount you pay on your debt obligations each month by your monthly gross income.

For example, if you have 1000 USD the amount of debt payments and your monthly gross income is USD 4,000, your DTI is 25%.

When you add parental student loans to your credit report, the monthly payment can be set off against you when you apply for the loan. If you are hoping to buy a home, this may reduce the amount you can borrow because mortgage lenders are trying to keep the total DTI from your existing debt and new mortgage loan down to 43% or less.

In other words, getting a parent student loan can affect your ability to get a loan when you need it.

3. It will be harder to save for retirement

IN US Government Accounts Chamber found that nearly half of Americans age 55 and older have no retirement savings. If you think you are behind the retirement plan, getting a parent student loan will only make it harder for you.

While it may seem selfish to some to focus on their own future rather than their children, it is important to note that while students have many funding options, there are no low-interest retirement loans for their parents.

If you donate your pension plan borrowing on behalf of your student-age son or daughter may mean that you will be living on less than you are comfortable with, working longer, or ending up relying on your children to support you financially.

4. Parental loans are more expensive

For the 2020-21 school year, Parent PLUS loans are available with an interest rate of 5.3% and a loan fee of 4.228%, which is deducted from the loan proceeds. In contrast, undergraduate loans have an interest rate of 2.75% and a loan fee of 1.057%.

If you do business with a private lender, you can usually avoid the down payment, but the interest rate will depend on your credit and financial situation. However, even with a star credit, it will likely be difficult to beat the terms of federal student loans for undergraduate students.

What’s more, if your family demonstrates financial need, your child may qualify for a subsidized student loan. The government pays interest on these loans while your child is in school and during future grace periods.

Of course, parental loans also allow you to borrow more than your child can through the Department of Education. But if they can get enough to cover their education expenses, conditions will be much more favorable if they take out loans.

5. This It can be tricky hand over a debt to your child

Some parents may take out parental student loans with the intention of handing over the debt to their child after graduation. And while some student loan refinancing companies allow this, your child will need to meet the lender’s requirements to transfer the debt.

While there are some exceptions, most recent college graduates likely do not. reliable credit historyso it can take years to transfer this burden. And if your child does not agree to take on debt, you are stuck in it because it is in your name.

To compromise, you can ask your child to make payments on your loans, but the debt will still be on your credit reports and influence you in other ways.

The essence

There is nothing wrong with helping your child financially while in college. But before you do that, it is important to consider how the decision to issue a parent student loan might affect you. In many cases, it may be better to encourage your child to apply for federal financial assistance on their own.

One way to help without risking your future financial security is to open and contribute to the 529 College Savings Plan. Funds in this type of account grow tax-free and there are no withdrawal taxes as long as you use them for eligible education expenses. What’s more, some states offer tax deductions or discounts on down payments.

Alternatively, you can provide a modest allowance to help your child with certain living expenses that are not covered by approved federal student loan uses. You can also help your child find a scholarship they can apply for and choose a school that is more affordable.

What is important is that you take the time to understand how parenting student loans can affect you and explore alternatives that can help your child get the funding they need without putting the burden on you.

About myFICO
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