Your Kid's College Loan: Who Should Foot The Bill?

By Reyna Gobel AAA

If you could afford it, you'd pay for your kid's future education expenses and not borrow a cent. But after reviewing your finances and potential scholarships offered, you may realize that student loans will be required to pay for part or all of the cost of college for your entering freshmen.
What are the federal student loan options for both parents and students for borrowing money? Read on to find out.

Complete the FAFSA
Filling out the Free Application for Federal Student Aid (FAFSA) is the first step to borrowing from the federal government, whether it's in your child's or your name. You'll provide information such as income, savings account information and driver's license numbers for both you and your son or daughter.

Even if you don't think you need a loan, you should still fill out this form because your child may be eligible for free money via a Pell Grant or a need-based scholarship from the university he or she decides to attend.

Based on the results of your FAFSA, you'll know what federal loans your son or daughter qualifies for. Filling out a FAFSA form is also generally the first step in acquiring PLUS loans - the federal loans for parents to help pay for their student's education.

Two general loan types for which your child could be eligible are subsidized and unsubsidized loans. These types of federal loans directly to students do not require a credit check.

  • Subsidized Loans - Loans where the government pays the interest for your child during college as well as under special circumstances. Always borrow your full amount of approved subsidized loans before borrowing any unsubsidized loans or loans for parents. Subsidized loans are considered Title IV aid, which means eligibility is income based.
  • Unsubsidized Loans - Your son or daughter will not have to make payments during college but interest will accrue. Eligibility is not income based but doesn't require a credit check. You could get this loan whether you make $30,000 or $3 million. Parent loans are unsubsidized and are generally considered gap fillers for paying for school beyond the amount for which the student qualifies.

Loan Borrowing Limits for Students
The loan limits for direct lending to students vary based on whether the student is considered a dependent or independent student. Generally, an independent student is a married student, 23 years or older, or is an active duty military personnel. Dependents will normally be eligible for less money in student loans because of the possibility of parents borrowing, too.

Dependent Students
The chart below shows an example of the annual and total loan limits for Stafford Loans given on or after July 1, 2008:

Year Subsidized Unsubsidized Total maximum loan Borrowing
Freshman $3,500 $5,500 minus subsidized loans and other aid received $5,500
Sophomore $4,500 $6,500 minus subsidized loans and other aid received $6,500
Junior and Senior Years $5,500 $7,500 $7,500

Independent students or dependent students who didn't qualify for parent loans

Year Subsidized Unsubsidized Total Maximum Loan Borrowing
Freshman $3,500 $9,500 minus subsidized loans and other aid received $9,500
Sophomore $4,500 $10,500 minus subsidized loans and other aid received $10,500
Junior and Senior Years $5,500 $12,500 minus subsidized loans and other aid received $12,500

Filling the Gap with Parent Loans
Each school sets a "cost of attendance", which includes estimates for tuition, fees and expenses, room and board, and textbooks. Parent PLUS loans can fill the gap between financial aid given to the student up to the full cost of attendance.

For instance, if the school your child chooses to attend has a cost of attendance of $20,000 per year, and your child receives $5,500 total in subsidized and unsubsidized loans, you could borrow up to $14,500 to make up the difference.

Applying for Parent PLUS Loans
Contact the university's financial aid office to find out which forms have to be filled out with the university and which can be filled out through Direct Loans, the government program by the Department of Education for federal student loans. Always fill out the FAFSA application first!

Credit Checks
Parents are generally required to pass a credit check to qualify for PLUS loans. According to GPO ACCESS, you can't have a 90-day delinquency on any debt or be within five years of "a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off of a Title IV debt."

The bright side of this rather stringent credit check is that income and debt-to-income ratios that would be considered for other loans are unimportant and maximum Stafford loans under the student's name are increased if the parent is ineligible for parent loans.

Repaying PLUS Loans
You can choose to start making payments 60 days or six months after the last disbursement, or after your son or daughter is no longer attending school on at least a half-time basis.

A Note About Interest Rates

You can expect significant rate differences depending on which type of student loan you choose.For example, for the 2010/2011 school year the fixed interest rate was a fixed 4.5% for subsidized Stafford loans, 6.8% for unsubsidized Stafford loans and 7.9% for PLUS loans.

The Bottom Line
How much to borrow is as important a decision for you as choosing a college is for your son or daughter. Learn what you are eligible to borrow, but research payment amounts and how it will effect your retirement and savings before signing on the dotted line. Other options your child can consider to pay for college include finding and applying for scholarships, choosing a cheaper school, work study, co-op programs, part-time work or attending a community college for the first two years.

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