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Everybody is familiar with student loans for education. As the cost of college has risen, so has the need for students to finance their education with loans. Every college's financial aid office offers the FAFSA form for federal student loans, but there are also other options. Since student loans typically weigh graduates with loan debt upon graduation, some parents decide to help cover some of the expense.

Since not all parents are able to write checks that cover their children's educational costs, they can choose instead to make use of parent loans. That is, if a parent has an eligible child who is attending an eligible educational institution for either a degree or a certificate, they have the option to take out a loan to cover their child’s school costs. There are a wide range of options for this sort of financing, both public and private. Thus, parents need to thoroughly research their options prior to taking out an education loan.

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What Is A Parent Loan?

Parent loans allow parents to borrow money for the sole purpose of helping their children with educational expenses. These loans are available both as federally backed loans as well as from a wide range of private lenders. Since these loans are exclusive to educational pursuits, special rates and repayment plans can apply. However, parent loans are ineligible for plans like student loan forgiveness in return for public or non-profit service.

A parent loan is further distinguished from a standard student loan by the fact that the student is not responsible for repayment. They allow parents to provide financial assistance to their children without further burdening them with debt just when they are trying to blaze a trail into the workforce. Thus, if a student is close to their maximum debt load from the federal loan system, their parents can chip in to help them complete school without resorting to private loans.

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Private vs Federal Parent Loans?

When deciding between public and private parent loans, it's important to note the significant differences between the two loan types. While it might seem that a private loan will be more expensive over the long-term, that is not necessarily the case. In fact, private lenders often offer terms that are far better than their public counterparts.

For instance, if a borrower chooses a fixed percentage rate, they will find that the public lender only offers one rate. However, if a parent has particularly good credit and opts for a fixed rate from Sallie Mae, their APR might be as much as 3% less than the federal loan. Thus, a parent with less than stellar credit should certainly shop around to discover who can offer them the best rates.

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Public and private lenders also offer very different repayment terms. Public loans offer limited options. When parents borrow educational funds through public channels, they can either start making interest and principal payments immediately or they may opt to defer payments until their student is no longer carrying the minimum ½ time course load. On the other hand, private loans let parents choose whether to start making interest/principal payments immediately upon disbursement, to make interest-only payments while their child is still in school, or to choose deferment until their student graduates or otherwise falls below the minimum course load requirement. Note that every private lender is different, and some will offer few, if any, repayment options.

Parents who opt for a private lender might also be able to save a bit more by participating in automatic debit plans for their payments. Private lenders also offer other incentives such as no origination fees, no prepayment penalties, and the ability to take out loans that cover the entirety of a child's school expenses, including room, board, books, and more.

What are the Different Types

There are other options available for parents who wish to help their children complete their education. For instance, parents might opt for a 401(k) loan or they might decide to borrow against their home's equity. If a parent has a 401(k) retirement plan, they can borrow up to $50,000 at a low rate that is not reliant on the parent's credit score. Thus, the loan is 100% guaranteed by the assets held in the 401(k). However, the loan term is only five years, which necessarily makes monthly payments quite high. Further, the loan must be repaid within 60 days of a job loss. Borrowers will also find that they are unable to make further payments into their 401(k) account until the loan is repaid.

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On the other hand, parents might choose to borrow against their home equity in order to help their child attain the education they need. These loans are based on a parent's credit rating, but since they are backed by the home as collateral, rates are far better that other, non-guaranteed loans. The downside is that if parent's default on the loan, they will lose their house. On the other hand, the interest on home equity loans up to $100,000 is fully tax-deductible.

What to Look For

  • Forbearance/Deferment:
    For various reasons, borrowers may need to put their loans into forbearance or otherwise defer payments. Many private and public loans will allow deferred payments while the student is still in school. Parent loans will likely continue to accrue interest during this period, but many private lenders allow interest-only payments that help borrowers control the total loan amount. Thus, a private parent loan might allow for a period where no payments are required, but during which parents can opt to make full or partial payments according to the repayment plan they choose. Federal loans might allow deferment, but the parent loans will continue to accrue interest during the time that their children are still in school. Public loans are also less flexible in that they don't offer a variety of repayment options while children are still in school.
    Forbearance is a period of time in which parents are excused from payments but during which interest will continue to accrue. Forbearance can be granted to borrowers who become ill, unemployed, or otherwise experience financial hardship. Federal loans allow up to three total years of forbearance while private lenders generally restrict forbearance to a single year.
  • Death and Disability Discharge:
    Federal parent loans can be discharged if the borrower becomes totally and permanently disabled. Student loan debts can also be discharged due to death. Note that not only will the debt dissolve once proof is provided to show the death of the borrower (the parent), but also if the student passes away. To prove death, the original or a certified copy of the death certificate must be provided to the loan servicer.
    To prove a total and permanent disability, borrowers need to show documentation from the Veterans Administration, the Social Security Administration, or a physician. For borrowers who have only the word of a physician, be sure to provide signed notarized documentation. In fact, most physicians should have a protocol for handling this sort of situation.
  • Interest Rates:
    Interest rates are perhaps the single largest concern for any borrower. When parents seek out the best terms for their loans, they will have many options to choose from. Federal loans generally have a single fixed rate that applies to all borrowers; private lenders can often offer lower fixed-rate options to borrowers who have very good credit ratings. On the other hand, their rates could be as much as twice that of the federally backed loans for borrowers who have poor credit scores.
    Sometimes borrowers decide to opt for variable rate loans. The interest rates for these loans is tied to the prime lending rate, which is subject to change. Thus, a borrower could find that their rates fall dramatically or their rates could increase suddenly and dramatically. Because of this, borrowers with variable rates may find it nearly impossible to project budgets.
  • Loan Fee:
    There are often fees associated with each loan type, such as origination fees. Federal loans typically charge a significant amount for originating the loan, while most private lenders have no origination fees. Further, both public and private lenders offer discounts to borrowers who make automatic payments from their checking accounts. Borrowers should check with their lender to see what specific fees or discounts are available, especially if they borrow from a private lender.
  • Eligibility Requirements:
    To qualify for a parent loan, there are several eligibility requirements. For federal loans, borrowers must be either citizens or permanent resident aliens with a valid green card. Borrowers will also need to submit to a credit check so that the loan servicer can assess their credit score. On top of this, borrowers need to provide proof of income and may need to provide a statement that reflects their assets.
    For parent loans, borrowers must show that they are the legal adoptive or biological parent, guardian, or even the stepparent of the student. It's also mandatory that they not have an adverse credit history. However, federal-loan borrowers can attain funds for their children if they have an endorser (co-signer) or if they can prove that some unusual extenuating circumstances precipitated their poor credit history.
  • Repayment Options:
    Repayment is a huge part of any parent's decision when it comes to taking out an education loan. Some loan types restrict the loan term to five years, while some private student-loan lenders allow up to ten years for repayment. Federal loans may allow for up to 15 years.
    While students are still taking courses towards their undergraduate degrees or certificates, parents have more options with regards to repayment. Some may choose to defer payments until their children are out of school. Other loan programs might allow, or require, parents to begin making full interest and principal payments as soon as their loans disburse. Private lenders sometimes offer the option for parents to make interest-only payments so as to contain the long-term growth of the loan.

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Parents Are Ultimately Responsible

While many, if not most, standard student loans are co-signed by parents, parent loans are the sole domain of the parent. That is, if a child/student is unable to make their loan payments, their cosigner will be held responsible. On the other hand, the child/student bears no responsibility for any parent loans. While many parents might make outside arrangements with their children that establish mutual responsibility for loan repayment, the student will have no responsibility to the lender for that loan. Even if parents write legally binding contracts with their children, only the parent will be responsible to the lender.

Why Sallie Mae for Parent Loans?

  • Why Sallie Mae for Parent Loans:
    Sallie Mae provides many incentives for parents to choose them. They offer full deferment while the child is in school, but also options for interest-only payments, a range of fixed rates based on credit score, zero origination fees, and no penalties for early payment.
  • Repayment Options:
    When parents take a Sallie Mae loan to help their children finance an education, they will have a number of options. While their child is still in school, parents can choose to start making interest-only payments that control the overall cost of the loan to the principal amount only, or they can choose to start making payments on both the interest and principal amount of the loan. Parents can also choose whether they prefer a fixed or variable interest rate. Lastly, Sallie Mae allows parents to receive a discount when they sign up for automatic payments.
  • Features and Benefits:
    Sallie Mae writes loans that cover more than just the cost of tuition. Parents can borrow money to cover housing, books, computer equipment, and even campus meal plans. On top of that, Sallie Mae provides $100 worth of free educational support to students. Thus, their services extend beyond a convenient, cost-effective way to finance a college education.