Introduction to College Loans

With many high school seniors having made the important and exciting decision of where they will attend college in the fall, parents and students alike are looking at the next set of hurdles standing between them and the first semester. One of those hurdles is putting together a payment strategy. Hopefully this includes grants, scholarships and other forms of aid provided by the school. Additionally, families may have education (529s) or other savings accounts to go along with installment payment plans provided by schools. With the rising cost of college, even with the options previously mentioned, many families will still need help financing the college experience.

Students are exiting college with over $20,000 in loan debt, on average. This isn't including loans that are in parents' names. As such, a student loan industry has developed. The Federal Government is involved, as are private banks and credit unions. Considering the number of people impacted by college loans in one way or another, there is much information and opinion floating around. Here are some myths (or half-truths) to be mindful of as your family navigates the college loan process.

This isn't meant to scare families as much as it is to make sure that everyone is clear on what they are potentially taking on.

A loan will help my student build credit.

This is one factor that helps families more easily digest the fact that students and parents are leaving the college experience with thousands of dollars of debt. While college loans can ultimately help students build their credit, the impact on their credit is minimal until a regular payment history is established. For this reason, it's not accurate to think that just because a student has a loan that is deferred (payments begin being made in the future) sitting in their name that they will come out of school with a shiny, high credit rating. It is not until the student shows that they can begin repaying their debt that they truly begin to impact their credit score.

This is why I recommend families look into student credit card options to cover the cost of certain goods during the college experience. These can be in the student's name, but still monitored by parents. They can be used for only books initially if there are concerns about misuse. Students can then use them for more fixed costs like certain utilities, groceries, etc. Remember, you do not need to carry a balance to grow your credit. The goal is to use the card and then pay the full amount owed by the due date. That will begin to show an ability to use credit in a responsible way.

We all know the dangers of credit cards, but if used correctly they can much more effectively build credit during the college years than loans that are sitting in deferment.

My student can get a loan on their own.

As looked at in the section above, young adults entering college likely don't have much of a credit history. It's hard to generate a credit score before college, and as a result lenders are hesitant to extend debt to 18 year olds. Yes, there are loans through the Federal Government that are extended without credit requirements, but for incoming freshman they max out at $5,500 in most situations. This unfortunately only goes so far, leaving families with a hefty remaining amount to be financed.

Beyond those through the Federal Government, students can take out additional loans in their name. However, in most cases, the bank or credit union will require a parent (or anyone deemed credit-worthy) to co-sign the loan. This means that the parent, and their credit score, is also on the hook for repayment of these college loans.

My student will eventually have to pay back our Parent Plus loan.

A Parent Plus loan is a way for college to be financed strictly through the parent's name. You can learn more about Parent Plus loans here.

Parents are willing to do this to help their student attend college. In some cases, there are expectations that the student, once graduated, will aid the parent in repayment of these loans. While these plans or agreements can certainly be discussed and made, students are not obligated to do so.

The loans are in the parent's name. If the loan is not repaid, guess who's credit gets dinged. It's not the student's. It's the parent's. Just because the loan was used to help support a student's education, the student's name is not attached to the loan in any way. For this reason, a parent can't legally force a student to repay this loan unless families have entered into and signed an agreement, which frankly doesn't happen.

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Hopefully you've found these initial tips helpful in starting your navigation of the college loan process. I offer a session that provides families with their loan options, discussing pros and cons. I also discuss overall strategy when it comes to installment payment plans, education savings plans, and other sources of college payment. You can call (727-372-9685) or email me (financialaidcoach@gmail.com) to discuss this service or others that I offer.