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.
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
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.
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