mother and son on computer

New rules that went into effect on July 1 drastically change how parents can borrow to help pay for a child’s college education. The federal loan program for parents, PLUS loans, has been drastically reduced. Parents can “only” borrow $20,000 a year, and for each student there is a $65,000 limit for parent borrowing.

I am all for parents borrowing less. I see far too many families take on a lot of student loan debt that they don’t get paid off before retirement. I would rather your child choose a school that doesn’t require you to borrow $20,000 a year, or up to $65,000 lifetime.

But the reality is that the cutback in this federal loan program will likely result in many families turning to the private student loan market to finance college. The government hasn’t really done anything to make college more affordable. It has simply decided to limit its involvement, which means private lenders—banks, fintech companies—will be the only option above the new federal PLUS loan limits.

If you are heading into the college years, or are a grandparent watching your family step into this big life decision, I hope you will be extremely careful considering any private loan for college.

Here’s what you need to know about private college loans:

  • You must qualify for a loan: just like borrowing for a car or a home purchase, lenders will check your income/debt level, your credit score, etc.
  • The interest rate can be variable, not fixed. If rates rise, the cost of your private student loan will increase.
  • The starting interest rate (or fixed rate) can be very good if you have a fantastic credit profile, but can rise to nearly 18% depending on your finances.

And here’s the big problem with all parental borrowing for college: No one is asking you if borrowing for a child’s education will make a mess of your financial security.

That’s my job! I need you to think about your retirement. If borrowing for college means you save less for retirement, or even worse, you have these loans to repay once you are retired, that gets a failing grade in my class on smart family finances.

The best move you can make, for you and your children, is to put in the time and effort to scope out schools that will not require your family to take on a lot of debt. That school exists, but it takes research to find the schools that are a great financial fit.

And if you do need to borrow, the student should always be the one to take out loans. The federal student loan program limits annual borrowing to $5,550 the first year, $6,500 the second year, and $7,500 for subsequent years, with a lifetime cap of $31,000, assuming your child is still claimed as a dependent on your tax return. (Independent students can borrow more.)

That $31,000 cap is a solid guardrail. It’s a manageable sum your child should be able to pay off within 10 years after graduation. That’s how you reap the benefits of a college education without taking on too much debt.

Share with a friend

Share this Article

Get Suze’s financial advice delivered straight to your inbox

    Top Resources for You

    Related Articles

    Categories: Budgeting, Credit & Debt, Saving, Student Loans