How Do Student Loans Work? A Comprehensive Guide for Parents

If your child plans to attend college, one of your primary concerns may be how to help them fund their education. Student loans could help make their dreams a reality. But navigating the complex world of student loans isn’t easy.

This student loan guide for parents covers what you need to know to support your child through the student loan process. We’ll demystify the process by breaking down everything from how to choose between federal and private student loans to how to consolidate and refinance student loans.

Supporting Your Child with Student Loans

As a parent, supporting your child through the student loan process helps pave the way for their academic and financial success. In addition to helping your child graduate with minimal debt, your involvement in the loan process could help them secure a larger loan amount or more favorable loan terms.

Helping your child choose the right student loan typically begins with researching the types of federal and private student loans available. Before comparing lenders, you should also familiarize yourself with interest rates, repayment plans, loan forgiveness plans, and other loan terms.

While student loans are one form of financial aid, you should encourage your child to explore all available financial aid options, including: 

• Federal aid, such as Pell Grants and subsidized loans, may be available depending on your family’s financial circumstances. Students can determine their eligibility by completing the Free Application for Federal Student Aid (FAFSA®). Explore our FAFSA 101 guide for an in-depth review of the FAFSA application process and deadlines you and your child should be aware of.
• Scholarships and grants are available through various sources, including private organizations, charities, labor unions, community groups, and religious organizations. Some organizations award based on academic or extracurricular achievements, financial need, or a specific field of study, while some organizations (like Ascent) extend scholarship eligibility directly to parents.
• Private student loans are issued by banks, credit unions, and lenders like Ascent. Private student loans can cover any gap between federal aid and the full cost of tuition and expenses, helping to limit out of pocket costs. Private loan interest rates vary by lender and are influenced by the borrower’s credit score, credit history, loan type, and other factors. Private student loans may offer more flexible borrowing limits, more repayment options, and faster approval times compared to federal loans.

Choosing Between Federal or Private Student Loans

While thousands of student loan options are available, federal and private student loans are the two most common types.

The United States government provides federal student loans and typically has uniform application processes, eligibility requirements, interest rates, and loan terms. Private student loans are issued by private organizations, with loan options, terms, and approval criteria that vary by lender.

Federal Student Loans for Your Child

Several types of federal student loans are available, each with unique terms and conditions. The most common include PLUS loans, direct subsidized loans, and direct unsubsidized loans. 

Parent PLUS loans are another loan option specifically designed to help parents finance their dependent children’s undergraduate education by bridging the gap in financial need not covered by other forms of aid.

One major advantage of federal student loans is that the government offers several loan forgiveness and repayment programs. Two of the most prominent are:

• Public Service Loan Forgiveness (PSLF): This program is available to those working in qualifying public service jobs.
• Income-Driven Repayment (IDR): These plans base your monthly payments on your income, and the remaining balances are forgiven after a certain period.

Federal loan repayment begins shortly after your child graduates. Typically, there is a six-month grace period before payments begin. Depending on your child’s financial circumstances, several repayment plans are available, including income-driven, as mentioned above, as well as standard, which offers a fixed monthly payment over a set period of time, usually 10 years and extended, which offers repayment beyond the 10 years. 

While it’s hard to know what post-graduation will look like, you can find comfort in options like student loan deferment and student loan forbearance which may also be available to help your child have a smoother repayment journey during financial hardship, if needed.

Private Student Loans for Your Child

Private student loans can help bridge the financial gap when federal student aid does not cover the full cost of your student’s degree. They can also help cover tuition expenses if your child is deemed ineligible for federal aid, based on financial need. 

Each private lender and loan type has unique qualification criteria, loan terms, and conditions. Carefully research your options and compare different lenders. Consider elements such as lender reputation, interest rates, repayment term options, quality of customer service, and if they offer support in your career journey post-graduation.

Unlike federal student loans, which have fixed interest rates that remain the same regardless of market conditions, private loans may offer either fixed or variable rates that go up and down. Understanding the future economic outlook is critical when determining which type of interest rate will be best for your student over the long term.  

It is also important to know the repayment terms, grace periods, and available forbearance options, which can vary significantly from those available on federal student loans.

Application Process and Eligibility Requirements

While some lenders allow you to check your rates without a hard credit check upfront, private lenders generally conduct a credit check to determine loan eligibility. If your child has a limited credit history or poor credit, they may not be eligible for no cosigner student loans. However, as their parent, you may be able to cosign your child’s loan or apply for a parent student loan, the latter in which the parent or guardian is the sole borrower. 

Applying as a cosigner has several benefits.  As a cosigner, you may help your child meet minimum qualification criteria, qualify for a larger loan amount, or secure more favorable terms. This decision should not be taken lightly, however, as cosigning means you will take responsibility for repayment of the loan if they cannot.

Every private lender has a unique application process, and your child will need to apply directly with each of their chosen lenders with a separate application for each loan. Approval and available interest rates will be contingent on your child’s creditworthiness, including their credit score and credit history (or lack thereof). In addition, cosigning a loan can impact your credit positively or negatively, depending on how repayment is handled. 

Make sure that you and your child are fully aware of all terms and conditions before accepting any private loan to ensure you can fulfill your financial obligation.

Planning for Student Loan Repayment with Your Child

Helping your child plan for student loan repayment may dramatically improve their financial health and reduce their stress during and post-graduation.

Charting a repayment plan is a big step toward managing your child’s student debt successfully and responsibly. It also helps them understand the implications of their financial commitment, budget effectively, and avoid stress. A structured plan can help your child make timely payments and build a positive credit history.

Here are five tips for healthy repayment practices:

• ACH Payments: Set up automatic payments so you don’t miss a payment! Some lenders (like Ascent) offer a discount for enrolling in automatic payments.
• Proper Budgeting: Don’t budget just for student loan repayments. Craft a comprehensive budget that includes all monthly loan payments, essential living expenses, savings, recreational money, and all other regular expenses.
• Extra Payments: Making extra payments or paying more than the minimum when possible will speed up the repayment process and reduce the total interest paid. Some student loan providers will even offer discounts to incentivize borrowers to start making minimum payment during in school and grace periods. 
• Refinancing: Refinancing can lower interest rates, decrease monthly payments, and lower the total repayment cost.
• Loan Forgiveness Programs: Forgiveness programs like PSLF offer a pathway to debt relief after a qualifying period, especially for federal student loans. 
• Emergency Fund: Building an emergency fund provides a financial safety net that helps avoid missed loan payments when unexpected expenses arise.

Additional Student Loan Resources for Parents

Although the world of student loans can seem complex, your family is not alone in this process. Plenty of resources exist for parents and students alike to help navigate this major financial decision. Here are some to check out:

• Financial aid offices and counselors at colleges and universities you are considering
• Parent support networks like College Parents of America or institution-specific groups
• Online tools and mobile apps for tracking repayment of student loans and other debt, such as Mint and EveryDollar

• The Federal Student Aid (FSA) website
• The Institute of Student Loan Advisors (TISLA)
• Ascent’s Student Loans 101 guide and blog

Learn More with Ascent

At Ascent, we’re committed to helping your child achieve their educational dreams while building a strong financial foundation for their future. From our award-winning loan options to our dedication to student success and financial wellness, we go beyond the typical student loan experience.

Our graduate and undergraduate student loans are designed with your family in mind. Whether you’re cosigning your child’s loan or applying for a parent student loan, Ascent has the right loan for you with some of the most flexible and competitive repayment terms in the industry.

FAQ

Do parents have to take out student loans for their kids?

Parents do not have to take out student loans for their kids, and many lenders (including Ascent) offer non-consigned loans for students who qualify. A cosigned loan may be a good option for students who do not qualify for a loan in their name. A cosigned loan can help student borrowers build their credit history. In contrast, the added financial security of the cosigner may help qualify them for a better interest rate and loan terms. Plus, borrowers with cosigners can apply to release their cosigner after making 12 consecutive full, on-time payments.

How much can a parent borrow for student loans?

The amount a parent can borrow for student loans will vary from one parent to the next depending on their financial qualifications, the loan type, and the lender terms.