Just recently I was at a Target store and I couldn’t believe they already had back-to-school supplies set up right next to clearance patio furniture. It is still summer and the last thing we want to think about is the upcoming school year, especially if they just graduated from high school! However, if you are a parent of a college student like me, you know the reality of that tuition bill that will be hitting your mail or email any day now.
Every year I visit with clients who are both excited that their child is heading to college, but are also worried about how to pay the tuition bill, which shows up before they can even move them into their dorm room. I can definitely relate. I have one child that is in college right now, one that graduated a few years ago, and still one a couple years away from college. What I can’t stress enough is the importance of discussing the options that are available to fund your child’s (or children’s) college tuition, and in advance if possible.
According to Salle Mae, the largest education assistance available comes from scholarships and grants and amounts to about 35% of the total assistance. The advantage of seeking out this type of assistance is that it does not need to be paid back. There are tons of organizations that offer scholarship opportunities, most of which require an essay answering one or a few questions about a specific topic. You can check out what’s available in Minnesota by visiting a site like mycollegeoptions.org or collegescholarships.org, or even visiting your child’s chosen college’s financial aid website, where you can find scholarships and grants the school may offer.
The next largest assistance comes in the form of parental income and savings. On average, this comes to $8,390 per child, per year. While you may have saved some money to put towards your child’s education, it may not cover the whole cost, at which point you need to ask yourself how you are going to cover the rest.
First, don’t panic. You are not alone. Millions of parents have either not saved for their children’s college or have not saved enough. In fact, statistics show that only 13% of families have saved anything marked for college tuition. The solution for many parents and students is to borrow the money. This can come in the form of federal loans through the completion of a Free Application for Federal Student Aid (FAFSA), private loans, or even your home equity. Make sure when deciding which loan is best for you that you use caution and research in depth. There are pros and cons to each lending option, and what works for your neighbor or family member may not work for you.
Here are some of the most popular borrowing options:
Federal PLUS Loans (fixed APR 7%)
This is one of the most common choices for parents. While you are just about guaranteed to receive some sort of federal aid despite less than perfect credit (this is the pro), the government lends without regard to ability to repay (this is the con). This means you risk overborrowing the amount needed to cover education costs. While the extra funds might seem nice to help front other costs for your child, such as books, rent, or even groceries, keep in mind that this all must be paid back. Moreover, education loans of any form are almost impossible to escape, even in bankruptcy. Overborrowing only adds to the amount of time it will take to pay them back, and you will be living with them until every cent is paid off.
Private Loans (Fixed APR averages 5.4%, variable starts at 2.9%)
There are plenty of lenders that want your business and will entice you with some attractive features to get your business.They will sometimes even offer multi-year approval (this is the pro). However, beware—if your credit isn’t strong and you lack stable employment, you may not qualify for these loans, or could see interest rates upwards of 12% (this is the con).
Home Equity (fixed interest rate averages 5.4%)
Using your home as collateral often helps you qualify for extremely low interest rates (this is the pro). However, you may run into hidden fees, so ask for quotes that include all costs, such as appraisals, service fees, etc. (this is the con). You should also consider that spending home equity leaves less for any future needs you might have, such as retirement (this is also a con).
Some final thoughts…
If you are absolutely set on helping pay for your child’s education, keep in mind the risks. Estimate the monthly payments that you can afford by running scenarios on loan calculators that are available and free on many websites. When doing this, keep in mind how many years of college you plan to pay for.
Once you have been approved for a loan, don’t necessarily jump at the first option—do your homework and see if you can get a better rate elsewhere. Shop around to really get a good idea of how much interest you’ll end up paying, and if there are any perks to one option over another (i.e., home equity loans tend to have lower interest rates overall versus a federal loan over a 10-year period).
If you still aren’t sure which option is best, run it past a financial professional like myself. I am more than willing to sit down and weigh the pros and cons with you regarding this major life decision. Since this directly affects your financial health, you want to be sure you are planning accordingly and keeping some other things in mind, such as your current and future income, when you want to retire, other financial obligations, and even planning for a few unexpected events that could occur along the way.
If your children or grandchildren are still a few years from their high school graduation and you want to take a proactive approach, we can talk about getting started on using various college savings strategies. Many options can help cover the cost of their chosen college or post-secondary school, reducing or even eliminating the amount of debt that would accrue to get them that four-year (or more!) degree. Additionally, Minnesota residents may now receive a tax benefit by contributing to certain college savings plans. Please let me know if you want more information on how you might benefit from this to potentially lower your MN income taxes.
My door is always open.