College continues to get more and more expensive: The average total cost at private colleges and universities topped the $40,000 mark during the 2013-14 academic year, according to the College Board. And given that tuition and fees are rising at a 3 percent to 4 percent clip annually, and have far outpaced both inflation and wage growth for many years, many families have had to resort to large student loans to cover the costs.
As a result, parents have to be smarter than ever about making sure they avoid what can be catastrophic financial mistakes. To help you make better decisions, here are four things that every parent should know about student loan debt.
1. Co-Signers Are on the Hook for Student Loan Debt
The recent story of Steve and Darnelle Mason shows the dangers of cosigning a student loan. The Masons cosigned about $100,000 in private student loans that their daughter Lisa took out to go to nursing school. When Lisa died of liver failure at age 27, the Masons suddenly found themselves the target of lenders seeking repayment for Lisa’s loans, and interest and late fees sent the total outstanding balance above $200,000.
Media attention to the Masons’ situation prompted at least one lender to reduce the interest rates and principal balances on the loans. But most people don’t fully realize the potential liability involved in cosigning a student loan until a tragedy like this occurs.
2. It Matters Who’s Borrowing the Money
Financial aid calculations assume that both students and their parents will make contributions toward educational costs. Accordingly, the financial aid packages that your child receives might include loans for both students and their parents. Just as with a cosigner on a private loan, whether the parent or the student is the legal borrower on a loan is a key consideration in who’s ultimately responsible for repaying it.
A willingness to be flexible with who’s taking out a loan can give you better terms. For instance, Parent PLUS loans offer features like reasonable fixed interest rates and options for delayed repayment, as well as simplified credit checks that can make parents more likely to qualify than if they worked with a private lender. But the overarching factor needs to be whether parents can repay loans in a worst-case scenario, and the more debt parents take in their own name, the more financially exposed they’ll be if things don’t work out as well as they hope for their child.
3. Know the Forgiveness Terms for Your Child’s Student Loans
The Masons’ story is just one example of how important it is to know the terms of a student loan. Different types of loans have different features that can make it easier or harder to repay under certain circumstances.
For instance, most federal student loans — including Direct Loans, Federal Family Education Loan Program Loans, and Perkins Loans — are automatically discharged in full if the student dies. For parents who take out federal PLUS loans, then either your death or the death of the student can lead to the loan being treated as repaid in full. Other situations can also lead to partial or full repayment, including permanent disability, forced closure of the school you were attending, and employment as a teacher or in certain other public-service jobs.