Even when parents save for college, sometimes the college savings falls short of covering the college’s net price. Some parents borrow private parent loans to close the funding gap and ensure that their son or daughter has the funding needed for another year on campus.
Parents sacrifice a great deal to get their child a good education – much more so than they’re credited.
According to Sallie Mae’s 2018 study,How America Pays for College, the combined family savings (between parents and the college-bound child) comprises almost half of all the funds used to pay for college.
Of that amount, parents are far and away the financial drivers of a family’s college savings, accounting for 34% of all college savings, compared to the child’s 13% in savings (with the rest coming from student financial aid).
The financial load a parent must bear for college doesn’t end with 529 plans, investment savings, or the steering of raises and bonuses toward tuition. In many cases, parents take out their own private loans to top off the college cost resources, and pay the loans off on their own.
While the big difference between a private parent loan and a traditional student loan is that the parent covers the former and the student pays back the latter, there’s more to the equation – much more.
For starters, not every financial institution offers a private parent loan option, but some of the larger banks do.
For example, Wells Fargo was the first to create a private parent loan.
When Congress ended the Family Federal Education Loan (FFEL) program in July 2010, Wells Fargo needed a loan product to replace the Federal Parent PLUS loan in their marketing program, so they created a private parent loan to fill the empty slot. (See a more complete list of private parent loans below.)
What’s Your Best Option for a Private Parent Loan?
If you’re a mom or dad in that scenario, choosing the best private parent loan becomes a process not unlike taking out a loan for home renovations or buying a new car. Interest rates, fees, payment timetables and finding the “sweet spot” needed for the proper loan amount all become paramount.
Let’s take a deeper dive into parent private loans, and see what steps to take, and which missteps to avoid, for the best family college loan experience.
Basically, there are two types of Parent Loans – Federal Parent PLUS Loans and Private Parent Loans:
Federal Parent PLUS Loans. Federal Parent PLUS loans are offered by the federal government to parents of dependent undergraduate students. Parent PLUS loans are the most popular type of parent loan, with more than 800,000 parents borrowing more than $12 billion in Parent PLUS loans each year. Parent PLUS loans have a fixed interest rate that is higher than the interest rate on the Federal Direct Stafford Loan and loan fees that are about 4 percent.
Private Parent Loans. Depending on the borrower’s credit score, private parent loans can be less expensive proposition than a Federal Parent PLUS Loan for college-minded families. Additionally, many private parent loans come with no origination fees.
Private Parent Loans – the Details
Technically, a private parent loan isn’t just available to parents.
Any family member or friend can take the loan and use it to pay for a student’s college costs. But, they don’t call it the “student loan for parents” for nothing, as parents are the most common borrowers.
Here’s what a typical private parent loan provides:
- With private parent loans, parents can usually choose either a fixed or variable interest rate option. Variable rates tend to be lower than fixed rates, at least initially. Specific interest rates depend on the borrower’s credit rating.
- In most cases, parents can choose whether to make payments during the in-school and grace periods. Parents can defer repayment during the in-school and grace periods or choose interest-only payments or fixed payments of $25 per loan per month.
- Parents can cut their overall loan cost by 0.25% or even 0.50% by enrolling in automatic payments, where the monthly payment is automatically transferred from their bank account to the lender. Electronic statements may also be available.
- With most private parent loans, there is no loan application or origination fee. Private parent loans, like other education loans, do not charge prepayment penalties for making extra payments or paying off the loan early.
- Private parent loans allow mom and dad to borrow a surprisingly large sum of money, often up to the full cost of attendance minus other aid.
Caveats of Private Parent Loans
Like any personal loan, a private parent loan borrower will undergo a credit check to qualify for the loan and to determine an interest rate.
In most cases, a lender may require the private parent loan to be school certified. This means the college financial aid office must confirm that the student is enrolled and specify the amount of the student’s loan eligibility. The loan proceeds are paid directly to the college, not to the parent. (Lenders, by and large, aren’t big fans of for-profit colleges.)
While parents can certainly avail themselves of a private parent loan, a thorough review of their family’s personal financial situation is advisable. For instance, you should take out a private parent loan only when your child has exhausted every other source of college financial aid.
You also might take out a private parent loan instead of raiding your retirement or taking out a loan against your home equity. These are financial resources that are best left alone, as you can directly benefit from rising home equity values and maintaining a robust retirement plan later on in life.
In general, don’t leverage appreciating investment assets to take on debt – even if it’s for your child’s college education.
Beware of other pitfalls of parent loans.
Lenders that Offer Private Parent Loans
When you begin kicking some tires of private parent loans, start with the parent loan options of these major lending brands:
- Citizen Bank Student Loan for Parents. This private parent loan offers both fixed and variable interest rates, with interest rate discounts of up to 0.50%. Loan repayment terms go as high as 10 years.
- College Ave Parent Loan. This loan also offers a fixed or a variable rate option, comes with no origination or pre-payment charges, customizable repayment terms of 5 to 12 years and has a unique wrinkle, offering $2,500 directly to the parent for any college-related out-of-pocket expenses.
- Sallie Mae Parent Loan. This private parent student loan can cover up to 100% of your child’s total college costs with a 10-year repayment term, comes with no origination fees, offers a 0.25% interest rate reduction for auto-debit and provides four free months of student study support.
- Wells Fargo Parent Loan. The Wells Fargo private parent loan comes with a repayment term of up to 15 years, loan limits of $100,000 minus other aid, and competitive interest rates.
There are also several state private parent loans.
Closing the College Cost Funding Circle
If the federal government won’t cover all of your student’s college costs, you’ve exhausted all scholarship and grant options, tuition installment plans are not a good match and you’ve depleted your college savings fund, a private parent loan can fit the bill, and close the funding gap for your child’s college education.
Educate yourself about private parent loans, and see if a private parent loan can work for you, and for your family.
At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.