Will student's credit suffer if mom can't pay school loans?
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Opening Credits
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Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
If I signed for a Parent
PLUS loan from Sallie Mae and don't pay it back on time, will it affect my
son's credit? -- Dolly
 Dear Dolly,
I can't help but wonder when people ask
"what type of trouble will occur if I do this" type questions: Is it because
you're thinking of doing something wrong, but you want to know the ramifications
before actually pulling the trigger?
I hope that's not the case and that
you're just being cautious. PLUS loans are given to parents to help them pay
for their kid's college expenses. If you qualify for these low interest rate
loans (currently fixed at 7.9 percent), you'll be able to borrow up to the
amount your son needs for his educational requirements. They are intended to
bridge a gap between how much your child gets in financial aid and the actual cost of
college. For example, if tuition, room and board, books and materials and so forth totals $8,000, but his annual student loan and aid allotment is
only $5,000, you could borrow the remaining $3,000 for him.
To answer your question about how a
PLUS loan can affect your son's credit report and scores: It doesn't. He is not
borrowing the money, you are. Because of that, his credit is neither positively
nor negatively affected by the way you treat the loan. In short, it will be
your credit rating alone that gets rewarded or dinged, depending on your
behavior.
Now I'm going to jump in and say that
I'm not a big fan of parents taking out loans for their kids' college
education. Yes, there are circumstances when it's a perfectly fine thing to do,
but in general, going into debt for your child in this way should be approached
with extreme caution.
Does this mean I'm opposed to parents
funding their kids' college years? Not at all. If you have the money set aside
and it fits with your philosophy, great! But if the only way you can do it is
to take on personal debt, you're putting your financial health and stability at
risk. I have a real problem with that.
If you overburden yourself, you may end
up having a hard time paying for such necessary expenses as your own rent or
mortgage, insurance premiums, transportation needs and even groceries. It can
also cause you to underfund your retirement plan. Do not put yourself in the
position where he has to worry about you in later years because you wanted to
make sure he didn't have to work in the local pizza place while he was a
student.
In the event you've already taken out a
PLUS loan or feel sure that you can handle the liability, know that the first
payment begins 60 days after the loan is disbursed. Depending on the repayment
option you choose, you have up to 25 years to repay. And if you ever experience
a hardship, get on the phone right away and communicate what's going on. You
could be eligible for a deferment or a forbearance.
Remember, it's your credit and finances
on the line. Be prudent, not emotional, when entering into these obligations.
See related: Student loans in default: What are your options?, Steps to make good on defaulted student loans, Unhappy with student loan terms? Consider these options
Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.
Send your question to Erica.
Published: June 29, 2011
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