By Brian Safdari, CCPS.
The college application system seems designed to confuse families. Parents and students start the application process in hopes of gaining admission. Then comes the FAFSA, which calculates the Student Aid Index (SAI) – what families are expected to pay — based on the parent’s adjusted gross income from two years prior.
Then, when acceptances and financial aid packages start arriving in March and April, families have only a month or two to make one of the biggest financial decisions they will ever have to make.
They hope that grants and scholarships will defray the cost, but when that first tuition bill comes due, hope is no longer an option. This is when parents turn to college loans, either through the federal government or private sources, such as banks and credit unions.
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Higher education is a business and it doesn’t always look out for the consumer’s best interests. Here are five things families need to know about loans when they’re deciding what to do.
1. Variable vs. fixed interest
Private lenders often offer attractive introductory interest rates as they market to potential customers for initial loans or refinancing. These interest rates are generally lower than the rate for federal Parent PLUS loans, which is currently 8.94% — and that can make a big difference in the size of monthly payments.
Parents should know, however, that private loans often have origination fees as high as 5%. After the introductory period, the interest rate on a private loan may rise and become variable rather than fixed. This can cause the monthly payments to increase, so they should carefully review the terms and conditions before signing on the dotted line.
The rate on a federal loan will remain fixed for the life of the loan, and the payments will never vary, making it easier to budget.
2. “Preferred” lenders
When Mom and Dad call the financial aid office and ask about options for covering the tuition bill, they may be handed a list of the college’s private “preferred lenders.” These are banks, credit unions and other financial institutions that the college has selected based on a set of criteria, such as transparency, origination fees, competitive interest rates and quality of customer service.
It’s illegal for a college to benefit financially from these arrangements. Parents can use the list as a starting point for research, and they are under no obligation to use a lender from the “preferred” list.
3. Loan forgiveness
When was the last time a bank forgave a car loan or mortgage? The same is true for student loans. Once they lend the money, it’s up to the borrower to pay it back over the next 10 to 25 years. In the event of cash flow challenges, private loans are not flexible in their payment terms. Miss a payment, and the interest rate can soar.
Federal loans, however, have several provisions for loan forgiveness. Here are a few examples of forgiveness scenarios:
Death: If the Parent PLUS borrower or the child for whom they took out a loan dies, the loan is forgiven. I had a young client who died tragically in an automobile accident; the $110,000 in loans held by his parents were forgiven.
Total and permanent disability (TPD): If the parent borrower becomes totally and permanently disabled, their loans may be discharged. Another client, a firefighter, became disabled and his $62,000 in loans were discharged.
Public service loan forgiveness: This is intended for borrowers who are employed full-time by a government agency or nonprofit. The process involves consolidating all of the borrower’s Parent PLUS loans into a direct consolidation loan and switching to the income-contingent repayment, or ICR, plan. After 10 years of on-time payments, the balance of the loan is eligible for forgiveness.
Another student of mine had $85,000 in college loans. He took a job with the federal government, and, assuming he stays in this job for 10 years and makes 120 on-time payments, $36,000 of his debt will be forgiven.
These provisions can be very complicated, so it’s often best to get advice from a college financial planning expert.
4. A new cap on Parent PLUS loans
Up until now, the Parent PLUS loan was limited only by the cost of attendance. A parent could borrow hundreds of thousands of dollars over four years while colleges kept raising tuition, fees and room and board.
Starting July 1, 2026, however, a provision in the administration’s 2025 budget bill caps Parent PLUS loans at $20,000 a year with a lifetime maximum per child of $65,000.
Whether this will pressure colleges into lowering the cost of attendance remains to be seen. What it does mean is that parents may have to supplement federal loans with private loans in order to cover college costs. And it may further limit a student’s choice of colleges.
5. Sometimes, a private loan is a better option
If the parents have an excellent credit history, adequate and consistent income, not a lot of debt and a healthy emergency fund, a private loan can be a good choice – especially if they can pay it back in the shortest amount of time possible.
This may take some rebalancing and reallocation of assets to create the necessary cash flow, but paying off a college loan within five years rather than 10 or 20 is a worthy goal.
Of course, the best way to help pay for college is to maximize grants and scholarships – money that doesn’t have to be paid back. Free money, as I like to call it.
If parents have a child starting college in 2028 (meaning they will be starting their junior year of high school in 2026), now is the time to review income and assets and position them in order to improve financial aid eligibility.
Why? Remember that the student aid index is based on the parent’s adjusted gross income from two years prior to the application year. The proper income modifications in 2026 can help a family qualify for additional financial aid in 2028.
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Brian Safdari, who founded College Planning Experts in 2004, is a Certified College Planning Specialist. He and his team have assisted more than 7,500 students nationwide on their college journey using their exclusive My College Fit System and financial planning tools. For more information, call 818-201-4847 or visit collegeplanningexperts.com.
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