Student debt and college loans, explained

Whether you’re borrowing funds yourself or considering how much your student should borrow for college, understanding student loans and student debt is a critical part of planning for education today.

Here are answers to common questions about student borrowing and college loans — and how they may fit in with your long-term financial goals. An Ameriprise financial advisor can help you develop a strategy for loans as part of your education goal while considering your full financial picture and long-term goals.

As you survey your loan options, take special care to understand all the terms and conditions.

Student loans: An overview

How much should I — or my student — take out in student loans?

Whether a strategic financing decision, a need to cover a gap, or a desire to have a student cover some of the cost of their own education, how much you choose to borrow will depend on a variety of both personal and financial factors. Your financial advisor can help you determine an amount that aligns with your other financial priorities and values.

What are the different types of college loans?

There are three main types of loans to cover higher education expenses:

• Federal loans are offered by the U.S. government to undergraduate, graduate and professional students — as well as to the parents of students — based on information provided in the Free Application for Student Aid (FAFSA). 
• Private loans are typically offered by banks or other financial institutions. 
• Institutional loans enable a student to borrow from a college directly as part of their financial aid package.

What are the advantages and disadvantages of the different kinds of loans? 

Learn more: FAFSA and the CSS Profile: What are they and how do they work?

Understand federal loans

What types of federal loans are available?

Students are eligible for two main types of federal loans: direct subsidized loans and direct unsubsidized loans. Each comes with different rules:

Is there a federal loan that allows borrowers to consolidate student debt?

Yes. Direct consolidation loans allow students to combine at least two eligible federal student loans into a single loan with a fixed interest rate based on the average rate of the loans being consolidated. Borrowers may also be able to lower monthly payments, because repayment terms can be extended up to 30 years. They may also get access to different repayment options. 

What federal loan options are available for parents?

Direct PLUS loans are for parents of undergraduate students or students enrolled in graduate or professional schools. Borrowers do not have to demonstrate financial need to be eligible. 

PLUS loans allow a parent to borrow the entire amount the student needs for college — including tuition, room and board, books and fees — minus any other financial aid the student receives. However, parents are permanently responsible for repaying the PLUS loan. Even if a child is eventually able to repay the loan, parents cannot transfer it to their child.

Student loan and payment considerations for parents

Will I have to co-sign a private loan for my student? 

Because private student loans are based on credit and most college students have a limited credit history, these loans tend to require a co-signer who will repay the loan if the student doesn’t. Only one person can cosign for a private student loan, and that person can be anyone — a grandparent, guardian or even a family friend.

However, the cosigner is often the student’s parent. If you choose to cosign a loan, know it doesn’t have to be a lifetime commitment. Many private lenders allow a borrower to release their cosigner after a certain period. The student can also refinance the loan in their own name — and release the cosigner — once they have good credit, sufficient income and a history of on-time payments.

Should I loan my child money to pay for college? 

The desire to help your child with college costs while wanting them to also contribute to their education is understandable. But be cautious about extending a personal loan to pay for school. 

Aside from the complications of dealing with interest rates, repayment schedules and the consequences of default, such loans don’t build credit and aren’t eligible for the student loan interest deduction. There are also tax consequences if you don’t document the loan properly. 

Consider this alternative: You can always help your child pay off their student loans if you want them to have some responsibility without being overwhelmed by debt.

Should I borrow money to pay for my child’s college education even if I could otherwise pay for it? 

It depends on your family’s unique situation. When weighing whether to borrow money or to tap into certain investments or assets to pay for college, it’s important to consider several factors, including the loan’s interest rates.

In some cases, it can make sense to take out a short-term loan while allowing your investments to continue growing at a potentially higher rate, and then pay off the loan later with the appreciated investment. The Ameriprise investment returns calculator and enhanced loan calculator can also help you crunch and compare the numbers.

Let’s weigh your loan options

Whether you’re paying for your child’s tuition yourself or helping them navigate the student loan process, an Ameriprise financial advisor can offer guidance as you decide what makes sense for you and your family.