When it comes to paying your child's tuition, when federal student loan resources are exhausted, you may find yourself trying to decide between cosigning a loan or reaching into your own pocket to make up the difference. Which is the better choice?
The answer depends on how much money is needed, whether you have the money available right now and your ability to afford payments on a private student loan - no matter how high the interest rate rises.
Let's take a look at five steps you should take in determining how to cover your child's college tuition costs.
1. Evaluate Borrowing Needs
Before you decide whether to cosign a private student loan or lend your child money directly, you need to figure out how much money your kid will actually need for college.
- Add up the perspective costs per semester for tuition, books, housing expenses, clothing, entertainment and groceries (or a dorm-based food plan). (If you're still deciding on where the student should live, see College Dorms: Good Value Or Ripoff?)
- Subtract the federal aid your son or daughter was granted.
- Subtract any money received for scholarships and part-time jobs your son or daughter is expected to work. Note that if part-time jobs are part of the equation, be prepared to have back-up money in a savings account in case the job ends.
- Meet with a financial aid officer at your son's or daughter's university to make sure the budget you derived from expected expenses represents a realistic budget - and to see if your child qualifies for additional scholarships or bursaries. (To read more on how to plan for college costs, see Preparing Parents' Pockets For College Tuition and Pay For College Without Selling A Kidney.)
2. Reduce Your Risk
Even if you've realistically evaluated your child's borrowing needs, make sure you evaluate their ability to repay the money they borrow. Do some research and find out what your son or daughter can be expected to make in their chosen career field once they finish school. If you child is studying to enter a low-paying field, he or she may have to reconsider this choice or reapply in a following semester when there are more scholarships available or to provide you and your child with more time to save the required funds.
3. Consider Cosigning for a Private Student Loan
Now that you know how much your kid needs to borrow and how much he or she can reasonably afford to repay after graduation, you can begin to evaluate solutions. The first possibility is cosigning a private student loan. Remember that if you are a cosigner on your child's loan, you have to be prepared to make the payments if your son or daughter can't - or doesn't - after college. When talking to different lenders, ask them about the minimum and maximum payments possible for your credit rating, because the loan will most likely have a variable interest rate. Compare offers from multiple lenders online, where you can plug in your location and amount needed and be matched with several loan companies. In addition, find out if your student loan has insurance coverage that protects your own assets should the student be unable pay. (For related reading, see Loan Deferment Saves Students From Disaster, College Cost Reduction Act Helps Students Meet Payments and Avoid The "Generation Debt" Trap.)
4. Consider Lending the Money Yourself
If you happen to have the amount needed sitting in your bank account and don't like the idea of variable interest rates, consider loaning the money to your child. You can charge minimal interest or none at all - the choice is up to you. You can purchase standard contract templates and fill in the specific terms in order to make the agreement just as official as a conventional bank loan.
However, if you are as queasy about lending money to a family member as you are about variable interest rates, there's a simple solution: there are online companies that services loans between family members.
For a fee, these companies will:
- Draft promissory notes to make the loan legal
- Set up electronic bill pay
- Create a payment schedule
- Call your son or daughter when he or she misses a payment
- Work with you to decide what you'd like the repayment terms of the loan to be
- Draft additional promissory notes for additional semesters
This will allow you to lend your child the money needed for college, without having to beg for it later. The company becomes the intermediary that your child has to deal with instead of the bank of mom and dad. Thus, you can enjoy Thanksgiving Day dinners as a family without money talk entering the room.
Of course, you could also just give you child the money as a gift with now strings attached. If you have the means, the choice is up to you, but this won't do much to teach your child about financial responsibility. If you don't have a lot of savings or a large disposable income, this could also jeopardize your financial goals. (For background reading on raising financially responsible children, see Use Allowances To Create Financially Sound Kids.)
5. Choose an Option
After you've looked at both options thoroughly, think about what works best for your individual situation. If you're more comfortable with a bank being the lender, do it. However, you will have to endure the ups and downs of the market as variable interest rates change.
If you don't mind using your own money - and you have it available - then lending the money yourself might be the better option. Just remember, whether it's the bank of mom and dad or the bank of Sallie Mae, there's always a chance that you will be the one who loses money. If you think a personal loan will put too much strain on your family's relationships, then you should avoid this option.
If neither option works for you, then you and your child have a choice to make. Without additional funding from the government, the hard decision becomes whether to change programs or schools or to simply delay the courses until your child saves enough money to pay tuition out of his or her own pocket.
For other ideas on paying for college read Graduate With A Degree In Financial Security.