When multiple children are set to attend college, it's crucial to develop a thoughtful financial approach that covers all years, not just the initial semesters.
Many families focus solely on financing their first child's education without considering the financial implications for younger siblings. The first bill can be overwhelming, making it easy to fixate on immediate solutions.
However, if you're planning to borrow for your children's education, assess your financial capacity carefully, especially when you have several kids in college. You risk facing loan denials mid-program or, worse yet, struggling with repayments you cannot afford.
On a positive note, an increasing number of families are preparing for multi-year college expenses—58% this year compared to 44% in 2019, based on data from Sallie Mae's 2021 report. If your youngsters are about to head to college, here's what to keep in mind regarding student loans.
Start with Federal Student Loans
Experts strongly advise starting with federal direct student loans before considering other options. These loans offer low interest rates (3.73% for 2021-22) and flexible repayment plans that begin after graduation or if the student drops to part-time status. However, many families may need to borrow beyond the federal limits to cover total college expenses. If that's the case, strategize your next borrowing steps.
Private Loans Typically Need a Co-Signer
Many parents are surprised to learn late in their child's high school years that their student cannot secure a private loan alone, explains Luanne Lee, a college planner. This often leads parents to consider loans that require them to co-sign, putting their credit at risk. A solid credit score might yield competitive interest rates, potentially lower than the current federal Parent PLUS loan rate of 6.28%. However, your debt-to-income ratio can change annually, which may lead to higher interest rates on future loans. If you accumulate more debt each year, you might face denials for additional loans down the line.
Federal Parent PLUS Loans: Simple to Obtain but Risky
The federal government allows parents to apply for PLUS loans regardless of income, unless they have adverse credit. (If denied, your child can borrow more in federal loans.)
If approved, you can borrow up to the total cost of attendance minus any financial aid received. This could lead to significant debt every semester, as many parents struggle with payments that start soon after the funds are disbursed. The PLUS loan has a 6.28% interest rate and a 4.228% origination fee (2021-22 rates). Unlike private loans, PLUS loans allow income-driven repayment plans if challenges arise, and deferrals are possible. However, the risk of accruing unsustainable debt can be high.
Patti Hughes, owner of Lake Life Wealth Advisory Group, notes that borrowing $25,000 for one child over four years results in payments of about $208.33 monthly, or $416.66 for two children. Some families face payments exceeding $2,000 monthly, which is often unmanageable. Assess what you can afford monthly and limit your borrowing accordingly.
Reverse Planning is Key
There's no one-size-fits-all approach to borrowing for education. Hughes emphasizes the importance of individual circumstances, such as your age, retirement savings, planned retirement date, and potential monthly payments based on expected retirement income.
Consider your health, other existing debts (like mortgage and auto loans), and whether you have insurance that could assist with college expenses. Job stability is another factor, as losing a job can affect your ability to secure loans and make payments.
Need Help? Here's a Sample Calculation
For instance, if your child graduates when you're 54 and you plan to work until 62, think about how much you can allocate to student loans for those 8 working years and calculate your affordability post-retirement. With a typical 10-year repayment plan for PLUS or private loans, you could be making payments until almost 65, impacting your retirement savings. If you have a mortgage, a student loan can add stress to your finances.
When consulting with families, Lee looks at potential four-year loan amounts, considering how many children will be in college and their ages. Together, they explore how much can be managed from current income and whether a delayed retirement is viable. It's also crucial to evaluate your child's future earnings, as different careers come with varied pay scales, affecting their ability to repay loans after graduation.
Unfortunately, students can't pivot to community colleges midway through their degree. Families contemplating full borrowing should reassess their options, including starting at community college, joining the military, seeking job-related training, or finding employers offering tuition reimbursement.
College expenses are undeniably high, and many families feel overwhelmed. You're not alone in this. As you research and plan, remember to explore your loan options beforehand. With the right information, you can identify a more sustainable financial path before committing to any burdensome payments. You can do this.
