Acceptance letters are in hand, graduation parties have wrapped up and the dorm shopping list is finished. With summer underway, there’s often only one major task remaining for parents shepherding a student into college: Paying the first dreaded tuition bill.
Coming up with enough money typically requires drawing on a mix of scholarships, savings and of course, student loans. Even then, there are often gaps, and many parents choose to fill them by seeking out additional loans tied to their name.
Parents are driven to help their kids succeed — many consider it their duty as a parent — and shouldering college debt is no exception, says Anora Guadiano, a certified financial planner at the New York City-based firm Wealthspire. But before you sign on the dotted line, you need to honestly assess whether it makes sense for you financially.
“We don’t know what our life is going to be like four years down the line, or 10 years,” she says. “You don’t want to be paying off that debt for the rest of your life.”
It’s critical, then, to do some homework to figure out both what you can afford and what type of loan you should choose. Consider whether you’ll need to borrow the same amount for every year of college, how much that total will work out to in monthly payments and whether you’ll be working long enough to pay off the debt.
Once you’ve got a ballpark figure for what you can afford, don’t just blindly take the first loan you're offered. “The best decision is the one that you have made after weighing all the pros and cons,” Guadiano says.
Here’s an overview of four common college financing options to get you started.
1. Federal parent PLUS loans
Best for: Parents who don’t qualify for lower rates in the private market, or parents who need flexible repayment options.
More details: Offered by the federal government, the benefits on Parent PLUS loans, also called Direct PLUS loans for parents, are more limited than the federal loans offered to undergraduate students. They are the most common tool for parents financing a child’s education; nearly 15% of bachelor’s degree recipients had federal parent loans taken out on their behalf.
On the upside, Parent PLUS loans are fairly easy to qualify for and you can borrow up to the full cost of college, minus any financial aid. There is a credit check, but it’s a simple one. You’ll be approved as long as you don’t have what's called an “adverse” credit history, defined as having recent accounts that are 90 days delinquent or in collections, or a recent bankruptcy, tax lien, wage garnishment or foreclosure.
The ease of access is actually a con, too, though. Because there’s no measure of ability to repay — and there’s virtually no borrowing cap — it is very easy to get in over your head.
These loans are also more expensive than federal loans for students. For the 2024-2025 school year, PLUS loans carry an interest rate of 9.08%. There’s also an origination fee of about 4.2% that is subtracted from the amount you borrow.
Payments on PLUS loans are due immediately; there is no automatic in-school grace period as there is for undergraduate student loans. That sometimes surprises parents, says Cathleen Wenger, an advisor with Thrivent, a non-profit financial planning organization.
That said, parents with these loans do have a few different repayment options, including one that ties their monthly payments to how much they earn, Plus, if you work in a qualifying job for 10 years (and jump through some other hoops), you can have parent loans forgiven through Public Service Loan Forgiveness.
2. Private student loans
Best for: Parents with high credit scores and low debt relative to income who can qualify for the lowest rates.
More details: Parents who have a “very good” or “excellent” credit score — above about 740 — can almost certainly find a lower interest rate than what’s currently available from the federal government. As of June 2024, fixed rates for private student loans start around 4.2%. (Private lenders also offer variable-rate loans, which the government does not, but those rates are higher than the fixed-rate options as of this writing.)
If you have a score in the low-to-mid 600s, you may get approved for a private loan, but you’ll likely get offered a rate that's much higher than the federal one. Private student loan interest rates currently max out around 16%.
Most private lenders do not charge origination fees, and they offer in-school deferments to postpone payments while your student is enrolled. You can also opt to make interest-only payments during school, which will help keep your total cost down, and some lenders offer special member benefits, like additional interest rate deductions to existing customers, Wenger says.
On the flip side, private lenders tend to have stricter repayment terms. Plans based on how much you earn are not widely offered, and forbearance options to help if you’re hit with a job loss or unexpected bills are more limited than the protections offered by the federal government.
Refinancing private student loans
Best for: Current borrowers looking to get a lower rate or cheaper payment on their private loans.
More details: Refinancing student loans is typically best suited for borrowers who already have private student loan debt. While federal loans can be refinanced, it’s crucial to remember that, once refinanced, they become private loans and lose all government benefits.
In some cases, it may make sense for you to refinance if you can get a lower interest rate or if you want to change other terms of the loans — like the repayment timeline or monthly payment amount — since lenders often let you choose a new repayment term between five and 20 years.
Refinancing is typically only advisable if certain circumstances have changed since the loan was originally taken out, such as an improvement in your (or your co-signer’s) personal finances — which could help you get a better interest rate — or if student loan interest rates are falling due to broader changes in the lending market.
3. Home equity lines of credit (HELOCs)
Best for: Parents with significant home equity and strong credit who are comfortable with the risk of using their home as collateral.
More details: American home values have soared recently, sending home equity levels to record highs. In theory, that gives parents who are homeowners a huge asset to tap for college funding.
The problem? Home prices aren’t the only thing that’s gone up. Interest rates on home equity lines of credit (or HELOCs) have climbed as well. Rates on HELOCs are currently hovering around 8%, depending on your credit score, location and lender. There are also fees and closing costs that vary by lender.
Taking out a HELOC was more common a year or so ago, Wenger says. “As rates have come up, it’s made [borrowing in a HELOC] less compelling. But people still need to evaluate all possible options.”
While these rates will likely drop later this year if the Federal Reserve starts long-awaited interest rate cuts, the same is true for private student loans.
Like with private loans, parents with excellent credit stand the best chance of finding a good deal. You’ll typically need about 20% equity in your home to get approved for a HELOC, but in general, more is better. Keep in mind that HELOC rates are usually variable, and many lenders offer a low teaser rate that lasts for a period around six months. That rate may be lower than what you’re offered on a fixed-rate loan, but it won’t last.
As always, the downside associated with a HELOC is you could put your home at risk: Since you’re using your home as collateral, if you can’t pay back your debt, you’ll face foreclosure.
4. Credit cards
Best for: Parents angling for rewards points who can pay off the balance almost immediately.
More details: Credit cards are not a smart option for long-term financing, as they carry much higher rates than other loans. But for parents who are trying to capitalize on credit card rewards, they may be worth considering, Wenger says. That’s if — and only if — you can pay off the debt more or less immediately.
Said another way, if you can't afford to pay the amount you’re charging in full, then you should not use a credit card. With average credit card rates sitting around 22%, the amount owed will start to “spiral quickly” as Guadiano says, and “that can be ruinous.”