When Does a Parent’s Income, Savings, or Investments Affect a Child’s Ability to Get Student Loans?

Do One Thing: If you have a child attending college in the 2024-25 academic year, no matter how high your income, fill out a Free Application for Student Aid (FAFSA). Apply again this year even if you didn’t receive aid last year.

Covering the Costs of Higher Education

The high price of a college education in the U.S. can be shocking if you haven’t seen the numbers in the last few years.

For the 2023-2024 academic year:  

• $10,662 average in-state cost of tuition and fees to attend a ranked public college.
• $42,162 average sticker price at a private college or university.

Keep in mind those figures don’t take into account the price of food, housing, and books, which can add thousands more to the total cost per year.

With prices soaring, it’s important to understand when a parent’s income, savings, or investments may impact a child’s ability to get student loans.   But first, let’s just revisit the landscape.

What Kinds of Loans are Available? 

Generally speaking, there are two kinds of student loans: private and federal.

Federal Student Loans

A federal loan – available for parents and students – is backed by the federal government, and is available with generally preferential interest rates and a host of helpful repayment options.  Student loans are not based on your credit score.  

Private Student Loans

A private loan is one that you would apply for from a credit union, bank, or other lender.  Rates vary with both current interest rates and the credit of the borrower.  

For undergraduates, federal student loans are capped depending on the year in college. Freshmen can borrow up to $5,500, sophomores up to $6,500, and students in years three and four can borrow up to $7,500 per year.

Federal Loans: When Does a Parent’s Income Matter?

Within federal loan programs, students whose parents have low incomes might get all or a portion of their loan subsidized, meaning that no interest accrues on the loan during the college years and for a six-month grace period following graduation, notes Ann Garcia, a certified financial planner with Independent Progressive Advisors.

Additionally, students whose parents do not qualify for parent PLUS loans because of poor credit, she explains, can borrow additional funds under the direct student loan program: $9,500 the first year, $10,500 the second, and $12,500 in the two remaining years for a traditional four-year degree.

For Private Loans, Credit Scores Matter, Too

With average college costs rising far above what’s available from federal student loan programs, many people also look to private loans to help pay for their higher education. Most students who need to take out private loans usually need a co-signer, Garcia says, which means they need a parent with good credit. Likewise, federal parent PLUS loans have a credit approval process, too. 

Tips for Maximizing Student Loans and Aid

Help Students Build Good Credit. Parents who intend for a child to apply for private loans in addition to federal ones, says Garcia, might help them out by adding them as an authorized user on a credit card. This can help the student build a credit history, which could result in the ability to secure a private loan without a cosigner.

Apply as Early as Possible. Paulo Lopes, an attorney and financial planner at Woodmont Financial Partners advises parents to file for financial aid for college as soon as possible. “Some financial aid is distributed on a first-come, first-served basis,” he says. “So, if you wait to submit the FAFSA, even if your parents’ income is very low, you might miss out on some of the benefits.”

Prioritize Retirement Savings. While this may seem counterintuitive, parents could prioritize saving and investing via retirement accounts as these types of accounts are not considered by FAFSA, Lopes suggests. Your primary residence also doesn’t count, he says, so using assets from taxable accounts to pay down debt like your mortgage will reduce the assets you must report. 

It’s Never Too Early to Start Saving for College 

If your children are still young, don’t forget about the benefits of a 529 plan, Lopes says, explaining that “Your kids not only benefit from the investments compounding over time but 529 plans are viewed more favorably on the FAFSA than other types of assets.”