Financial Aid and Student Loans: 4 Facts Parents Should Know

Financial aid and student loans can help a student fund higher education at a college, university, community college or vocational school. Parents have a role in the financial aid process, too. Here are four important fact for parents helping to finance a child’s education.

Your Income and Assets Count

Whether or not you plan to help your child through college, your income and assets will be used to determine your child’s financial need. Students are considered dependents until they are 23 years old, married or in graduate school, regardless of whether you claim them as dependents with the IRS or whether you will be providing financial support. The only exception is for students who are active-duty military personnel or veterans.

If your child doesn’t meet at least one of those criteria for being an independent student, you will need to complete the parent portion of the FAFSA, and your income and assets are considered when calculating the Expected Family Contribution (EFC). Schools subtract the EFC from their cost of attendance to determine how much financial aid a student needs and qualifies for. The EFC isn’t necessarily the amount you or your student will have to pay.

If you are no longer married to your child’s other parent, the parent who has custody of the child, or who last had custody prior to the child turning 18, will need to complete a dependent student’s FAFSA. If you have since remarried, the new spouse’s income needs to be included in the parent section.

You Can Take out Student Loans for Them

Through the PLUS Loan program, you can take out student loans on behalf of your dependent student. PLUS loans are offered through the same financial aid and student loan programs that provide student loans directly to the student. Unlike the loans for students, PLUS Loans do require you to pass a credit check. If you don’t pass the credit check, someone can co-sign a PLUS Loan with you. The funds for a PLUS Loan are sent directly to the school. The school may require you to sign and return a check, and the funds are applied to the student’s expenses.  

Rules for Parent Loans Have Changed

If you took out a PLUS Loan for an older child, prior to 2008, the repayment options have changed. Previously, parents began repayment on PLUS Loans almost immediately after the funds were disbursed. On PLUS Loans disbursed after July 1, 2008, parents now have the option of deferring payment until six months after the student graduates or drops below half-time enrollment, the same as for student loans in the student’s name. PLUS Loan interest accrues from the date of disbursement, so parents still have the option of beginning repayment 60 days after the loan is disbursed.

Parent Loans May or May Not Be Right

PLUS Loans are just one of the many funding options parents may consider to help their children with the costs of college. Banks and private lenders may be able to offer loans and other financing options for funding a child’s education. Parents may also consider tapping into home equity, selling investment or borrowing against a 401(k) plan. Each option carries advantages and disadvantages, depending on your personal financial situation. A financial planner can help determine which options make sense for your long-term financial goals and retirement planning.

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