Victoria Chasin got into medical school this year. She's 24, from Colorado. The federal loan would cover $50,000 a year, and she knew that wasn't enough. So her dad cosigned a $54,000 private loan. She got the rate down to 3%, partly by agreeing to pay $25 a month while she's in school. Next year she'll do it all again, at whatever rate the lender quotes. Oyin Adedoyin tells her story in Tuesday's Journal. It's about to be a lot of families' story.
Here's what changed. Graduate students used to borrow the full cost of attendance from the government. Rules that took effect this summer cap federal graduate loans at $20,500 or $50,000 a year, depending on the field. A lifetime cap of $257,500 covers undergrad too. Parents used to be able to borrow the whole undergrad bill. Now they're limited to $20,000 a year. We covered the per-child lifetime cap on parent loans when the Fafsa opened earlier this month. The $20,000 is the yearly limit under it. The Education Department says the caps are partly meant to slow the ballooning cost of college.
Private lenders are happy to fill the gap. South Carolina Student Loan cut its credit-score floor to 600 for healthcare students, from the usual 670. Its graduate loans grew 300% to 400% from last year. The average request rose to $34,000 from $19,000. Sallie Mae (SLM) expects private originations up 12% to 14% this year. ELFI, a lending arm of SouthEast Bank, says tens of thousands of students and parents prequalified this year, and it added staff to keep up.
What a private loan gives up
A federal loan usually skips the credit check and charges one fixed rate, 8.07% for graduate loans this year. It comes with repayment plans tied to income and forgiveness for public-service work. A private loan looks at credit and income first. Some students won't qualify at all. Kristin Blagg of the Urban Institute put it simply. Some borrowers will get these loans and some won't. The ones who do often get there the way Chasin did, with a parent's signature. One mother in the story chose private loans on purpose, because her strong credit beat the 9.07% Parent Plus rate.
Our read
This is Cash Flow (M5), and the planning point is one word. Cosigning. A cosigner isn't vouching for the student. A cosigner is a borrower. If a payment is missed, the lender can come to you for all of it, and it lands on your credit. That's the trade the new caps push onto parents. The government's loan has a high rate, 9.07% on Parent Plus, but it's the parent's own loan with the parent's own terms. A cosigned private loan at 3% is cheaper, and it sits on both of you until it's gone. Neither is wrong. Both should be priced before the acceptance letter gets framed.
In your plan, a cosigned loan belongs on your own debt line, not the student's. The one check this week, if you have a student in the house, is the yearly gap. Write the cost of attendance, subtract aid and the student's federal limit, and see what's left. That number is what you'd be cosigning, every year. If it's bigger than you'd lend a friend, say so now. Bring it to the next review and we'll run it with you. The umbrella is cheaper before the forecast changes.