How to Fill a Larger College Tuition Gap: Clarify Your Options

Student loans can make your academic dreams attainable. Unfortunately, the financial aid letter can come short of affording your top-choice school. Know the details regarding all of your financial options to avoid borrowing heavily. Having a secure cosigner is a great way to potentially lower your loan interest rate and therefore your overall loan payments.

Before we dive into the details of adding a cosigner, let’s start at the beginning of the student loan thought process.

Thinking about student loans…

First, note that college loans should be the last resort, not the first option. Before researching loan options, utilize existing college savings to help cover the cost.

Next, look for free money: grant, scholarships and gifts. Utilize this free tool to search for over $10 million in student scholarships nationwide.

Finally, determine if you, or a parent, are able to make room in your budget to cover the cost through a payment plan. Many colleges offer various payment plan options which allow you to pay the balance over the course of the academic year.

When these three methods exceed the total cost of attendance, no loans are necessary. If there is a gap between expected costs and the available resources, then it’s time to consider different loan options. For most students, the Federal Loan program is the best option because of the offered interest rate and repayment terms. However, there is a cap on the amount that can be borrowed. You can read more about the types of federal student loans here.

In the case where there is still a financial gap remaining after taking out federal loans, the next step would typically be to pursue a private student loan.

Stay informed with a larger financial gap…

Let’s take a look at a Federal PLUS Loan. A Federal PLUS loan is a parent loan, not a student loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan. Become informed about a Federal PLUS Loan before deciding to take that route.

The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high. This means it’s possible to borrow more than you can afford to pay back.  This loan also has an origination fee of 4% or more.

Let’s take a look at the repercussions of pulling retirement savings for college tuition. Every dollar you withdraw from your retirement account is one less that can earn interest, dividends, or appreciate to grow your retirement savings. Just as young families are instructed to start saving early to benefit from compounding interest, older savers should avoid touching the nest egg because time to grow the account is becoming smaller.

Taking the cosigning route…

Many parents with good credit can receive substantially lower interest rates on private loans than from the Federal PLUS program. The best option to overcome the tuition bill gap is to co-sign a private student loan with a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once the student establishes their own good credit.

With this type of college borrowing, a parent can effectively lend their established credit profile to their child. Now, the student can be approved for a loan when they otherwise would not qualify. Once a good repayment record on the loan is established, the student should contact the loan provider to release the co-signer from future payment obligations.

Remember to exhaust all other financing options before taking out a student loan. If necessary, make a note to research available loan options to find the best solution for your financial future.