There are also loan forgiveness options that students may want to consider. If your child serves in the military or performs certain volunteer work after graduation, he or she may be eligible to have part of the loan forgiven. Explore these options at www.finaid.org.
Stafford loans may not cover the entire college bill, so federal Parent Loan for Undergraduate Students (PLUS) loans are also available. Parents can use PLUS loans to borrow the full cost of attendance, less any financial aid package.
At many colleges, PLUS and Stafford loans are made directly by the federal government. If your child’s school does not participate in the direct lending program, you may be able to get PLUS loans from private lenders, but they may charge higher interest, 8.5%, as opposed to the government’s fixed rate of 7.9%. Repayment of PLUS loans can be deferred for six months after your child graduates school, but be aware that for PLUS and unsubsidized Stafford loans, deferred interest is added to the loan balance.
PLUS loans are subject to a credit check. Kantrowitz notes that independent students as well as those whose parents are ineligible for PLUS loans may borrow more than the Stafford loans’ stated limits.
Michael and Karin Zimmerman took out a $5,000 PLUS loan and intend to cap Chad’s student debt load at $10,000. “That’s about what I owed when I graduated, so I don’t want him to owe more,” Karin says. However, Andréa Holman of San Leandro, California, advises otherwise. She took out a PLUS loan years ago to finance her son Marcus’ education at Hampton University. “At the time I saw it as an emotional safety net, but now I strongly advise parents to explore all their options before taking out a PLUS loan.”
If you do opt to take out a PLUS loan, determine to borrow intelligently. Be aware that PLUS loans charge a fee of 4% out of each disbursement. Come up with a plan and time frame for paying off the loan (there is no prepayment penalty). If paying the loan off early is not an option, be sure to ask your tax preparer about writing off the interest you’re paying. Even if you don’t itemize your taxes, you may be eligible to write off up to $2,500 a year in interest.
Lesson #3 Room & Board
Consider a housing purchase. If you send your child away to college, room and board will be a major budget item. On-campus housing averages $8,000 a year; over four years you can expect to pay $30,000 or more per student. One way to trim this cost—and possibly turn a profit—is to buy your child a place to live near campus. In many markets, housing prices are appealingly low—even in college towns. When your son or daughter graduates, you could sell the property at a gain. Even if you just break even on the real estate, you could save thousands of dollars in room and board. Tax breaks can help when you rent to multiple students. You’ll collect rent while you receive all the tax deductions available to owners of investment property: travel costs, maintenance, depreciation, etc. If you name your child as property manager, you could pay him or her a reasonable management fee, which will be deductible for you, the property owner, while your student might owe no tax.