4 Things Every Parent Should Know About Student Loans

College continues to get more and more expensive: The average total cost at private colleges and universities topped the $40,000 mark during the 2013-14 academic year, according to the College Board. And given that tuition and fees are rising at a 3 percent to 4 percent clip annually, and have far outpaced both inflation and wage growth for many years, many families have had to resort to large student loans to cover the costs.

As a result, parents have to be smarter than ever about making sure they avoid what can be catastrophic financial mistakes. To help you make better decisions, here are four things that every parent should know about student loan debt.

1. Co-Signers Are on the Hook for Student Loan Debt

The recent story of Steve and Darnelle Mason shows the dangers of cosigning a student loan. The Masons cosigned about $100,000 in private student loans that their daughter Lisa took out to go to nursing school. When Lisa died of liver failure at age 27, the Masons suddenly found themselves the target of lenders seeking repayment for Lisa's loans, and interest and late fees sent the total outstanding balance above $200,000.

Media attention to the Masons' situation prompted at least one lender to reduce the interest rates and principal balances on the loans. But most people don't fully realize the potential liability involved in cosigning a student loan until a tragedy like this occurs.

2. It Matters Who's Borrowing the Money

Financial aid calculations assume that both students and their parents will make contributions toward educational costs. Accordingly, the financial aid packages that your child receives might include loans for both students and their parents. Just as with a cosigner on a private loan, whether the parent or the student is the legal borrower on a loan is a key consideration in who's ultimately responsible for repaying it.

A willingness to be flexible with who's taking out a loan can give you better terms. For instance, Parent PLUS loans offer features like reasonable fixed interest rates and options for delayed repayment, as well as simplified credit checks that can make parents more likely to qualify than if they worked with a private lender. But the overarching factor needs to be whether parents can repay loans in a worst-case scenario, and the more debt parents take in their own name, the more financially exposed they'll be if things don't work out as well as they hope for their child.

3. Know the Forgiveness Terms for Your Child's Student Loans

The Masons' story is just one example of how important it is to know the terms of a student loan. Different types of loans have different features that can make it easier or harder to repay under certain circumstances.

For instance, most federal student loans -- including Direct Loans, Federal Family Education Loan Program Loans, and Perkins Loans -- are automatically discharged in full if the student dies. For parents who take out federal PLUS loans, then either your death or the death of the student can lead to the loan being treated as repaid in full. Other situations can also lead to partial or full repayment, including permanent disability, forced closure of the school you were attending, and employment as a teacher or in certain other public-service jobs.

By contrast, private loans almost universally have less generous forgiveness or deferment rules. As with other forms of consumer credit, including credit card debt and auto loans, lenders have wide latitude in setting the terms of their private student loans, and they have no incentive to offer forgiveness for policy reasons in the same way that the federal government does. However, as private businesses, lenders often assess whether a given private student loan is uncollectible, and if they decide that offering a modification is more likely to get them a larger recovery than trying to enforce the original terms of the loan, then they'll make that business decision.

4. The Best Debt Is No Debt

Given the high and ever-rising costs of tuition, room and board and other expenses, it will remain a huge challenge for most families to finance a college education without loans. Nevertheless, if you can start investing cash for that purpose early (in a 529 Plan, a Coverdell account, or some other more potent growth tool than a bank account), even small amounts of savings can add up to a substantial balance by the time your child starts college. By doing so, you can take a big step toward offsetting what would otherwise be larger loan balances for your child to face.

Knowing more about student loans doesn't mean that they will be easier to repay. But by being aware of some of the pitfalls, you can at least take steps to reduce the chance of any nasty surprises that could crush your financial future.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.

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I like what socioeconomist1 wrote"""" hey Donald TRUMP filed Bankruptcy and now he is worfh billions!!! I guess you have be shady

August 31 2014 at 2:39 PM Report abuse +1 rate up rate down Reply

Why not just pay the $50 per month for 20 years, and then a year before you can qualify to file for student loan forgiveness totally screw up your finances and bury your cash out of sight... Take on huge debt. Then when the student loans are forgiven, file for bankruptcy and boom... free and clear.

August 22 2014 at 4:14 AM Report abuse +1 rate up rate down Reply

Parents should get a guarantee of job placement for their kid or double their money back.

August 21 2014 at 7:22 PM Report abuse -2 rate up rate down Reply

Rather than using college as a way for students to get a trade or a vocation we need to revise high school so that students can have an apprenticeship or a vocational education. We have forgotten that average doesn't mean stupid and that college is not for everyone. No one who doesn't want to go to college should be forced into it because our educational system fails to equip him or her with the skills for finding and keeping a decent job. This is part of what the common core is about. We need to expand our definition of a good high school education back to what it was in the mid 20th century: one that allowed people to hold responsible positions and let them have a good middle class life.
I have medical school debt, but if I can't pay back my student loans it's my own fault. Even if I'm going to be paying them off for 30 years they will be paid off. I may not have an Audi or Mercedes but I have a job that I love and enough coin to drive a used Toyota, insure it for cheap ($25/month at Insurance Panda) and take care of my family. I'm sorry that I'm not sorry that the average American can't have a luxury vehicle.

August 21 2014 at 3:27 PM Report abuse -1 rate up rate down Reply
3 replies to tyceragab's comment

You can get a bachelor's degree, studying in English, at a university in Belize for under $1,000 in annual tuition.

August 21 2014 at 11:00 AM Report abuse -1 rate up rate down Reply
2 replies to williammus's comment

Pretty far commute though

August 21 2014 at 4:15 PM Report abuse -1 rate up rate down Reply

Belize one of the most corrupt Islands in the world. Let me know if you find your stolen car there with the License plates still on it.

August 21 2014 at 7:11 PM Report abuse -2 rate up rate down Reply
John Weiss

Recent college grads must realize that the primary purpose of work is to become self sufficient, which means earning enough money to pay for your own food, shelter, clothing...and your student loan payments. If you want to save the world, do good things for humankind, or level the playing field for technology access, you can do that after work and on weekends. Your first priority is to get a job....and get out of debt. Why? because in the short and long term, debt will make your life miserable and unproductive.

Read more about the adult world of work and job hunting in my new book, WELCOME TO THE REAL WORLD: A Complete Guide to Job Hunting for the Recent College Grad, c 2014, Skyhorse Publishing Inc.

WELCOME is available in paperback and eBook from Barnes and Noble, Amazon and Skyhorse. Also, it is stocked in all B & N stores and in college/university book stores as well.

Read this book recent college grads. You will not be sorry.

John Henry Weiss
Author and Executive Recruiter

August 21 2014 at 10:53 AM Report abuse +1 rate up rate down Reply
1 reply to John Weiss's comment

Can I get the book for free in pdf?

August 21 2014 at 7:25 PM Report abuse -2 rate up rate down Reply

The loans aren't translating in college grads getting jobs in related fields thanks to the imported workers filling the positions. The loans are keeping an educational system's own employees employed at the expense of parents and their kids.

August 21 2014 at 10:43 AM Report abuse +1 rate up rate down Reply

Today taking a student loan is just feeding the job scammers. The visas and other scams means your kid isn't getting the job.

August 21 2014 at 10:35 AM Report abuse +2 rate up rate down Reply