Whether you’re borrowing funds yourself or considering how much your student should borrow for college, understanding student loans and student debt is a critical part of planning for education today.
Here are answers to common questions about student borrowing and college loans — and how they may fit in with your long-term financial goals. An Ameriprise financial advisor will help you develop a strategy for loans as part of your education goals while taking into consideration your full financial picture and long-term goals.
As you survey your loan options, take special care to understand all the terms and conditions.
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In this article:
- Student loans: An overview
- How much should I — or my student — take out in student loans?
- What are the different types of college loans?
- What are the advantages and disadvantages of the different kinds of loans?
- Understanding federal loans
- What types of federal loans are available?
- Is there a federal loan that allows borrowers to consolidate student debt?
- What federal loan options are available for parents?
- Student loan and payment considerations for parents
- Will I have to cosign a private loan for my student?
- Should I loan my child money to pay for college?
- Should I borrow money to pay for my child’s college education even if I could otherwise pay for it?
- Questions to ask an Ameriprise financial advisor
Student loans: An overview
How much should I — or my student — take out in student loans?
First, determine how much you choose to take out in student loans. Whether driven by a need to cover a gap, a choice to have a student cover some of the cost of their own education or a strategic financing decision, your financial advisor can help you determine an amount that aligns with your other financial priorities and values.
Guidelines for student loan payments
Limit the balance of student loans to 1.5 times what a graduate expects their annual starting salary to be in their first year out of school. This translates to debt payments of no more than 12% of a student’s monthly take-home pay. (Use our enhanced loan calculator to understand the numbers.)
What are the different types of college loans?
There are three main types of loans to cover higher education expenses:
- Federal loans are offered by the U.S. government to undergraduate, graduate and professional students — as well as to the parents of students — based on information provided in the Free Application for Student Aid (FAFSA).
- Private loans are typically offered by banks or other financial institutions.
- Institutional loans enable a student to borrow from a college directly as part of their financial aid package.
| Header Cell - Column 0 | Federal loan | Private loan | Institutional loan |
|---|---|---|---|
| Advantages | Terms and conditions are set by law | Higher borrowing limits | Potentially more competitive interest rates and deferment provisions than both federal and private loans |
| Row 1 - Cell 0 | Fixed interest rates and income-driven repayment plans, typically not offered by private lenders | Ability to help a student build their credit score | Row 1 - Cell 3 |
| Disadvantages | Lower borrowing limits | Interest rates are often higher | School borrowing limits, eligibility requirements and repayment conditions apply |
| Row 3 - Cell 0 | Row 3 - Cell 1 | May require a cosigner unless the student has established credit | Row 3 - Cell 3 |
| Row 4 - Cell 0 | Row 4 - Cell 1 | Aren’t eligible for income-driven repayment plans or federal loan forgiveness programs | Row 4 - Cell 3 |
| Row 5 - Cell 0 | Row 5 - Cell 1 | May not have deferment or forbearance provisions | Row 5 - Cell 3 |
Understanding federal loans
What types of federal loans are available?
Students are eligible for two main types of federal loans: direct subsidized loans and direct unsubsidized loans. Each comes with different rules:
| Direct subsidized loans | Direct unsubsidized loans |
|---|---|
| Available only to undergraduate students enrolled at least half time at a school that participates in the Federal Direct Loan Program. | Available to undergraduate or graduate students enrolled at least half time at a school that participates in the Federal Direct Loan Program. |
| Only available to students with demonstrated financial need. | Available to students regardless of income or financial need. |
| The loan amount is determined by the school, and it may not exceed the student’s financial need. | The loan amount is determined by the school based on the cost of attendance and other financial aid received. |
| Interest on the loan does not accrue until six months after the student leaves school. | Interest begins to accrue once the loan is dispersed. |
Is there a federal loan that allows borrowers to consolidate student debt?
Yes. Direct consolidation loans allow students to combine at least two eligible federal student loans into a single loan with a fixed interest rate based on the average rate of the loans being consolidated. Borrowers may also be able to lower monthly payments, because repayment terms can be extended up to 30 years. They may also get access to different repayment options.
What federal loan options are available for parents?
Direct PLUS loans are for parents of undergraduate students or students enrolled in graduate or professional schools. Borrowers do not have to demonstrate financial need to be eligible.
PLUS loans allow a parent to borrow the entire amount the student needs for college — including tuition, room and board, books and fees — minus any other financial aid the student receives. However, parents are permanently responsible for repaying the PLUS loan. Even if a child is eventually able to repay the loan, parents cannot transfer it to their child.
Student loan and payment considerations for parents
Will I have to cosign a private loan for my student?
Because private student loans are based on credit and most college students have a limited credit history, these loans tend to require a cosigner who will repay the loan if the student doesn’t. Only one person can cosign for a private student loan, and that person can be anyone — a grandparent, guardian or even a family friend.
However, the cosigner is often the student’s parent. If you choose to cosign a loan, know it doesn’t have to be a lifetime commitment. Many private lenders allow a borrower to release their cosigner after a certain period. The student can also refinance the loan in their own name — and release the cosigner — once they have good credit, sufficient income and a history of on-time payments.
Should I loan my child money to pay for college?
The desire to help your child with college costs while wanting them to also contribute to their education is understandable. But be cautious about extending a personal loan to pay for school.
Aside from the complications of dealing with interest rates, repayment schedules and the consequences of default, such loans don’t build credit and aren’t eligible for the student loan interest deduction. There are also tax consequences if you don’t document the loan properly.
Consider this alternative: You can always help your child pay off their student loans if you want them to have some responsibility without being overwhelmed by debt.
Should I borrow money to pay for my child’s college education even if I could otherwise pay for it?
It depends on your family’s unique situation. Your financial advisor will review your options with you to help determine the best path for your family. When weighing whether to borrow money or to tap certain investments or assets to pay for college, it’s important to consider several factors, including the loan’s interest rates.
In some cases, it can make sense to take out a short-term loan while allowing your investments to continue growing at a potentially higher rate, and then pay off the loan later with the appreciated investment. The Ameriprise investment returns calculator and enhanced loan calculator can also help you crunch and compare the numbers.
Questions to ask an Ameriprise financial advisor
- Can you help me determine the amount that makes sense for my student and my family to borrow, considering my other financial goals?
- Should I consider strategically taking out a student loan to allow my other investments to continue to grow?
- Can you help me review my family’s student loan options to ensure I get the right fit for my overall financial strategy?
Let’s weigh your loan options
Whether you’re paying for your child’s tuition yourself or helping them navigate the student loan process, we will offer guidance as you decide what makes the most sense for you and your family.
Disclaimer
This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial cannot guarantee future financial results.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
© 2023 Ameriprise Financial, Inc. All rights reserved.
This content was provided by Ameriprise. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.
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