What families need to know before paying for college

For the upcoming school year, many college student families will have less access to federal student loans than in years past, and will need to find the best alternative to help their students pay for their education.

The “big, beautiful bill” generally reduces the amount of federal student loans provided to students and their families to cover the costs of higher education. Beginning in the 2026-27 school year, families will have a $20,000 annual limit on Parent PLUS loans, where the previous limit was set on the cost of attendance at a student’s school. The bill also introduces a total limit of $65,000 per child for parents.

The amount of federal student loans that college students can take out on their own will not change, but the new Parent PLUS limits will restrict some families’ federal financing options.

Nearly three in 10 current Parent PLUS borrowers are likely to have problems with the new limit, and about 22% will be limited by the overall cap, according to a Brookings Institution analysis of data from the National Center for Education Statistics.

In addition, middle- to upper-income families who are not eligible for Pell Grants are more likely to face border issues. Nearly half of households earning more than $130,000 a year borrow more than $20,000 a year, according to calculations by the Brookings Institution.

What to do before borrowing

The most important thing for families to do is calculate the cost of tuition over four years for their undergraduate students and make sure they can afford it.

“I’ve talked to parents of high school students who have kids going to college,” said Jack Wang, a college financial aid advisor at Innovative Advisory Group and host of the Smart College Buyer podcast. “They’ll say, ‘We’ll borrow $20,000 a year…’ and I keep having to remind them, ‘Yes, you can do that, but then you have to come up with a different strategy for year four, because the Parent PLUS loan won’t be available to you.’

This may also mean that students will have to choose a less expensive school and decide if the cost of studying at a four-year university is worth it. Families with children who are high school seniors should also begin applying for federal aid and scholarships.

Private student loans

Once a dependent student, who can get $5,500 to $7,500 a year in federal loans for themselves, and their parents have reached the maximum amount of federal student loans they can take out and don’t have the money to pay the remaining amount, the next step for most families is to look at private student loans, Wang said.

Private student loans tend to be riskier than federal student loans, as they often have higher interest rates and do not offer the same forgiveness programs available to federal loan borrowers. While some private loans allow payments that adjust to income changes and provide forbearance to borrowers with financial problems, they are not guaranteed, unlike federal loans.

“Private student loans are good alternatives to federal loans,” Wang said. “People just need to really understand the differences and what they may or may not get compared to federal student loans.”

Families applying for private loans will also undergo a credit check, a process not required for federal loans. As a result, borrowers with lower credit scores may get worse loan terms, and most students will need their parents or grandparents to co-sign the loan with them.

“I talk to very intelligent parents who don’t realize that co-signing means they’re also on the hook legally for those loans, and [missed payments] “It will show up on their credit report and affect their ability to get other loans or refinance their mortgage,” Wang said.

Personal loans

Some families may use personal loans, such as home equity loans, bank loans, or 401(k) loans, to pay for educational expenses. However, Wang said these types of loans typically should not be used to pay for education compared to any federal or private student loans.

In some cases, families with good credit can get more favorable terms for a home equity line of credit. For the 2025-26 school year, the interest rate for the Parent PLUS loan is 8.94%. Meanwhile, the average interest rate for HELOC loans is 7.82%, as of November 1, according to Bankrate.

However, HELOC loans are generally only recommended to be used to increase the value of the borrower’s home, such as for renovations or repairs. Compared to a student loan, where missing a payment hurts the borrower’s credit, missing a HELOC payment can put the borrower’s home at risk.

Taking out a 401(k) loan can be another option for financing a child’s college education. This type of loan withdraws money from the parents’ retirement fund; However, if that money was still there, it might have been earning interest or benefiting from a rising market.