How Much Should Parents Borrow to Pay for College for their Children?

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Mark Kantrowitz

By Mark Kantrowitz

June 22, 2020

Parents can borrow up to the full cost of education, minus other financial aid, to pay for their children’s college education. But, how much parent debt is reasonable and affordable?

Growth in Parent Borrowing

Federal Parent PLUS Loans have grown as a share of federal loans for undergraduate education, from 15% in 2010-2011 to 25% in 2018-2019, as shown in this chart. The growth of parent borrowing has been driven, in part, by more students in Bachelor’s degree programs reaching the aggregate loan limits

Parent Loans as Percentage of undergraduate loans chart

The average Federal Parent PLUS Loan has increased from $11,922 in 2010-2011 to $15,774 in 2018-2019, a 32% increase.

Don’t Over-Borrow

If the student has reached the federal student loan limits, the family may need to borrow parent loans or private student loans

But, needing to borrow parent loans or private loans may be a sign that the family is borrowing too much money to send the child to an expensive college that offers less generous financial aid. The parents should consider sending their child to a less expensive college. 

More than a third of parents who borrow Federal Parent PLUS Loans have cumulative Federal Parent PLUS loan debt for just one child that exceeds their annual income, based on data from the 2015-2016 National Postsecondary Student Aid Study (NPSAS:16). 

Keep Parent Debt in Sync with Income

Parents should borrow no more for all their children than their annual income. 

If total parent loan debt is less than annual income, the parents should be able to repay their parent loans in ten years or less. 

If total parent debt exceeds annual income, the parents will have difficulty affording their monthly loan payments. They will need an alternate repayment plan, such as extended repayment or income-contingent repayment, to afford the monthly loan payments. 

These repayment plans reduce the monthly payment by stretching out the repayment term of the loan. But, a longer repayment term increases the total interest paid over the life of the loan. 

Pay Off Parent Loans by Retirement

Parents should aim to have all debts, not just parent loans, paid off by the time they retire. 

If parents expect to retire in less than ten years, they should borrow proportionately less. For example, if parents expect to retire in five years, they should borrow half as much.

Don’t Put All the Debt Burden on the Child

Some parents assume that the child will repay the parent loans. 

Legally, only the parent is responsible for repaying a parent loan, but the parents can have a side agreement with their child, where the child agrees to repay the parent loans. 

With a private student loan that is cosigned by the parents, both the child and parent are responsible for repaying the private loan. 

Although private and parent loans let the family borrow more than the loan limits on federal student loans, this can result in the child being responsible for repaying too much education debt.The child’s total debt at graduation, including any parent loans they are expected to repay, should be less than the child’s annual starting salary. If total debt exceeds annual income, the child will struggle to repay the debt and may default.

If the child defaults on a student loan borrowed or cosigned by a parent, it can ruin the parent’s credit, not just the child’s credit.

Don’t Borrow from Retirement or Home Equity

Parents should be cautious about borrowing from their retirement plans or a home equity loan.

Borrowing from retirement plans puts your retirement at risk. There are also other drawbacks to borrowing from retirement plans. 

  • Retirement plan loans must usually be repaid in five years or less. 
  • 401(k) plans are funded with pre-tax money, but a 401(k) loan is repaid using after-tax money. This money will be taxed again when the funds are withdrawn in retirement, leading to double taxation. 
  • Until the 401(k) loan is repaid, the employee may miss out on the employer match for contributions to the retirement plan.
  • The employee may have to repay the retirement plan loan immediately if they lose their job.

Borrowing a home equity loan puts your home at risk. If you default on a home equity loan, you can lose your home. If you default on a student loan, the lender can’t repossess your education. The interest paid on a home equity loan is no longer tax deductible, from 2018 through 2025, inclusive.

The proceeds from home equity loans and retirement plan loans may count as an asset on the Free Application for Federal Student Aid (FAFSA), reducing the student’s eligibility for need-based financial aid.

A good place to start:

See the best 529 plans, personalized for you