Last Minute College Planning

August is back to school time, and college tuition bills are due soon. If you’re writing tuition checks, you’re past the point of setting up a 529 savings plan, filling out the FAFSA , selecting a college, and applying for scholarships and financial aid. The reality of the remaining cost and the immediacy of the expense may be stressing you out. Life happens, and we aren’t always prepared the way we’d hoped.

So what do you do now?

Take Stock of your Resources.

In a perfect world, you should have 3-6 months of living expenses available in a savings account that you can access in emergencies, retirement savings through your employer, and additional savings for retirement outside your employment.   Don’t wipe them out paying for college.

It can be difficult to get money saved, and wiping emergency funds out can put you in a much tighter financial spot if a real emergency like a job loss or heath surprise come along. Borrowing against your 401(K), as some employer plans will allow, can put a significant dent in your retirement savings because your account is credited with the interest you’re paying versus actual investment returns. Many plans won’t allow you to make contributions while you’re repaying the loan either. If things don’t go as planned, and you aren’t able to repay the loan, the IRS requires you to report the loan as income and pay an additional 10% penalty.   Consider these alternatives instead:

Lifestyle shift – Look at your current lifestyle and be honest with yourself about whether or not you can fund at least part of the cost of college from your current cash flow. If you’ve been taking an expensive family vacation every year, or are using an annual bonus as an entertainment slush fund, it’s probably time for a paradigm shift.  This won’t help with the bill due today, but an honest assessment and change of plans might make things easier when the next bill comes due.

Family members – Many families are helping their parents as well as their kids, so this might seem like a ridiculous suggestion. But over the years I’ve worked with many grandparents who said they wanted to leave their children or grandchildren money when they die, and they have specific funds in mind. They don’t always consider that assistance with college today is far more helpful to their families than inheriting money someday. It’s worth a discussion. Tuition paid directly to a college doesn’t count against the annual gift exclusion either.

The 800 Pound Gorilla – Sometimes families have property or other assets they don’t even consider as a resource.   Have you held onto a vacation property that you don’t use as often now that your kids are older? Do you own a rental property that doesn’t really cover its costs? What about a car that you’ve been working on for years that hasn’t moved from the garage? At the very least, they should be looked at and considered as a financial resource in this day of on-line auctions and Craigslist sales.

Look at Borrowing Alternatives.

Before borrowing your way through the college years, it’s important that you consider how much debt is a reasonable amount to take on for your child’s education. Chip Workman covered this question well in his blog How Much is Too Much? Once you’ve decided on a target amount you can live with, the next question is from whom?

Family – At the risk of receiving hate mail, I think it’s worth talking to family members as a first line of defense. If your family cannot afford to gift for college, they may be able to lend instead. Interest rates on savings accounts are low, and receiving an interest payment of 3-5% for money borrowed is much better than the next-to-nothing interest they are receiving from the bank. But you have to do it right, and you have to treat the loan like any other so you don’t ruin your relationship. Prepare a promissory note to document the terms of the loan, and be clear with other family members that need to know about the arrangement.

Home Equity Line of Credit (HELOC) – After so many years of using homes as ATMs, and the crisis that followed, this may not be the option that it once was. But if you have enough equity built up in your home to give you the flexibility to borrow, HELOCs remain an attractive low-interest, tax-deductible alternative. Be sure to shop around versus simply going to your current bank, because there are big differences in closing costs and rates among credit unions, banks and mortgage brokers.

Government Loans – Unless you qualified for a financial aid award when you completed the FAFSA, you don’t have the option of using a federally subsidized Stafford loan, but you will still be eligible for an unsubsidized one. Both currently have an interest rate of 4.29% for undergraduates (5.84% for graduate students) plus a 1.068% loan fee on the amount borrowed. The drawback of the unsubsidized Stafford is they begin accruing interest immediately versus allowing you to defer interest while you’re in school. PLUS loans are another option, but they are much more expensive, with an interest rate of 6.84% and a loan fee of 4.27%, and the same immediate interest accrual. The biggest benefit of these loans, even with their higher cost, is the possibility of adjusting the repayment terms if you lose your job or become disabled.

Private Loans – Private loans are made by everyone from Discover to your local credit union. The interest rates and terms of these loans will vary widely, and are dependent on your credit rating. They often require you to cosign, which means you will have to repay the loan if your child doesn’t, and they don’t care if you lose your job or become disabled (see other considerations for co-signing here). Overall, they should be used as a last resort, but if needed, be sure to evaluate the choices using a tool like simpletuition. A quick search on their site for a $10,000 private student loan provided me with 7 choices, with interest rates ranging from 2.17% to 12.84%, depending on my credit score.

Make sure your child has skin in the game.

As the parent, you may feel responsible for paying for college, but it doesn’t mean your child should be given a free pass for free-spending. Tuition bills are high, but decisions about housing, overseas study opportunities, outside activities like sororities and entertainment can have an even bigger impact on how much is spent on their education.

If your child wants to live in a new, off-campus apartment her sophomore year vs. sharing a house with several other roommates, the difference in cost should be discussed and your child should help come up with the funds.

Encourage your kids to work part-time during school to help with expenses. It’s great practice for what comes after graduation, helps them learn to organize their time, and creates an appreciation for the money that’s being spent. If your child is out of school during the summer, a full-time job to help pay for school, or an internship in their field of study, is a reasonable expectation. To help pay for college I did everything from tutoring accounting students to working for the Army Corps of Engineers, and each experience taught me something.

If your kids grow up in a financial bubble where mom and dad take care of everything because you don’t want them to experience any stress, it only makes things more difficult for all of you later. You’ve created the expectation that money is no object, and they will expect you to continue the behavior after their graduation. It’s better to be clear about finances now and teach them how to manage their needs, wants and wishes, than have them financially crash and burn later.

It’s the best education they’ll ever receive.

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