What to Consider Before Applying for Student Loans

The cost of a college education remains a big challenge for many families. If there isn't enough cash on hand, or if a 529 account is not sufficiently funded, then student loans become the next option to consider. Parents need to assess whether they want the loans in their name, their child's name, or both.

Before considering any borrowing strategies, I encourage my clients to have a frank conversation with their children about the cost of college. Helping kids understand that a reasonably-priced school often gives the same quality education as an expensive college. It may be helpful to say "We'll pay the equivalent cost of a top-tier in-state public college, and any costs above that is something you'll need to finance." Another key consideration: Students should only borrow money that equates to loan repayments of less than 10% of their likely future income, based on their hoped-for field of work. 

Many parents want to be as helpful as possible with their children's education, but such generosity should never imperil their own financial future. For example, I gently discourage clients from cashing in part of their IRA to pay for education. Borrowing against the equity in your home is also generally unwise.

Most of the time, federal loans will be the best choice for students or their parents. They tend to offer the best rates, the most flexible repayment terms and on occasion, loan forgiveness features. (Most federal student loans are issued for 10 years). After the child has graduated, some people look to consolidate their loans with a private lender--if interest rates have fallen by a fair margin. Private lenders sometimes offer attractive loan terms at the start of education--but only if the borrower has a stellar credit history.

To be sure, the student loan system is a bit of a challenge to navigate these days, as the pot of federal money available for such loans starts to shrink. If you have a child that is midway through high school, you may want to contact a college financing expert as you navigate various options.