Parent-Sponsored Loans Explained

A parent who wants to pay for a child's education but does not have the money to send a child to college can elect a sponsored loan. This means the parent, not the child, will be ultimately responsible for repaying the debt. The student will continue through college without any burden of repayment, and the loan will never appear on the student's record. Instead, a parent manages the whole process with the lender and the college in order to cover tuition costs.

Federal Parent Sponsored Loans

The most popular parent sponsored loan program through the US Department of Education is the PLUS loan program. Similar to other federal direct loans, this program helps cover the cost of tuition on a term-by-term basis. Once a student knows the tuition requirement, an application is sent in for the sum for that term. The funds are then delivered straight to the student's account with the college to pay tuition only. The PLUS loan program comes with advantages like a fixed rate, options for subsidies for needy parents and even no penalties on prepayment or consolidation of the debts.

Requirements for Parent Sponsored Loans

Parents seeking the PLUS loan funding must meet credit worthiness requirements. They will not qualify if they have defaulted on previous federal loans or owe money to the IRS. However, income levels will be more flexible, and economically-disadvantaged students will not be penalized. Private lenders will set their own requirements for parent sponsored loans. They will also base their decision on credit score and past loan performance. The main difference is, where federal loans often favor low income individuals, private loans will favor those individuals with high income and asset bases. In fact, even a home equity loan is a potential parent sponsored loan option through a private lender.

Cancellation of Parent Sponsored Loans

One concern some parents have is that the cancellation regulations for a loan discharge may not apply. For example, a standard federal student loan is cancelled if the student dies, becomes disabled or is unable to achieve a degree because a school closes. In the case of the PLUS loan program, the loan debt would be cancelled for the parent as well. With private loans, separate cancellation rules may apply. Any parent who feels a loan should be discharged under certain criteria can always seek to have the debt absolved in court under those criteria.

Combining Parent Sponsored and Student Loans

Most parents sponsored loans are not used as the sole source of financing for a student's college education. In fact, limits on the PLUS loan program make it hard to use the program funds alone for a complete college education. Private loans can fill in some gaps, and grants and scholarships can take care of a portion of expenses. In terms of living expenses, however, most parent-sponsored loans will not cover the costs. A student may be required to get a student credit card or opt for a work-study program in order to continue to afford certain expenses while attending school on parent sponsored loans.

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