When we consider helping our kids prepare for college, we often think about signing them up for SAT classes or driving them to campus visits.
However, for many parents, the process also includes considering how to offer help paying for college.
From cosigning a student loan to using retirement money to cover college expenses, there are several strategies parents need to consider before the college year begins.
How to help pay for college
The earlier you start planning for college, the better off you (and your child) will be. However, even if you didn’t start when your child was a baby, there are ways for you to provide support as your child gets an education.
1. Create a college savings plan
One of the first steps you can take is anticipating that your child will need help paying for college. Whether you have one year or 18 years, setting up a college savings plan for your student can help you get ahead of the game.
The most popular way to save for college is through a qualified tuition program or 529 college savings plan.
According to the U.S. Securities and Exchange Commission, all 50 states and the District of Columbia sponsor at least one type of 529 plan: prepaid tuition plans or college savings plans.
However, each state has different rules and benefits attached to its state-sponsored college savings plans. So be sure to read up on what your state offers and how your savings could add up over time.
Unlike other savings plans, 529 plans have high contribution levels that allow you to put away more money for your child’s education. Plus, the long-term investment options provide a way for the account to potentially grow at a faster rate.
When you’re ready to help pay for college, you can withdraw money for tuition and school-related expenses, such as textbooks and housing, without penalty. And the money you take out isn’t taxed.
2. Apply for PLUS and private loans
Right now, 3.4 million parent borrowers have Parent PLUS Loans, which they use to help their children pay for college. You can apply for a Parent PLUS Loan by using the Free Application for Federal Student Aid (FAFSA).
PLUS Loan holders can borrow an amount that’s as high as the cost of tuition. And the loan is treated like any other federal student loan, with a few exceptions.
One exception is that your student loan bill comes as soon as your loans are fully distributed. Another is that you might not qualify for forgiveness programs offered for traditional student loans. However, there are ways to lower your PLUS Loan payments to a more manageable level.
Parent PLUS Loans also come with a fixed rate of 7.00%, which is currently the highest rate charged for federal loans.
If you might not qualify for Parent PLUS Loans — or if you can get a lower interest rate elsewhere — there’s also the option of going through private lenders and banks.
Private student loan rates can be lower than federal loan rates if you have good credit (usually a score of at least 670, according to credit agency Experian) and an income that allows you to handle the monthly payments with ease. Each lender has its own requirements, though, so it’s important to do your research and shop around.
You also might be able to access other features and terms through private loans. When you apply for private loans as a parent, make sure you understand the implications and compare your options.
The reality is a Parent PLUS Loan isn’t always the way to go, so get rate quotes from different lenders and compare them to PLUS Loans. You might be surprised at how much better you can do with private student loans.
3. Cosign student loans
When you decide to offer help paying for college, you should consider the pros and cons of cosigning a student loan.
If a student needs to supplement their federal student loans, they often they turn to private student loans as an option. However, private student loans require an extensive credit history and a good credit score, which many students don’t have yet.
That’s where parents come in.
When you cosign a private student loan, you essential take on liability for the loan if your child is unable to repay it. While your child benefits, you take on a risk.
Becoming a cosigner on a student loan can be a simple answer to the question of how to help pay for college when you don’t have cash. But it should be done with careful consideration.
Take into account your student’s financial goals and history of financial responsibility before you cosign a student loan for them. And figure out what it will take to be released as a cosigner on the student loan.
4. Tap into retirement plans
According to a recent study from the University of Michigan, 60% of students get help from their parents to cover college costs. And 35% said their parents help with tuition, giving $10,147 on average.
Where does this money come from? In some cases, it might come from retirement plans. If you can afford it, using your retirement funds can be an easy way to provide help paying for college.
For parents or grandparents under the age of 59 and a half, early withdrawal penalties on IRA accounts don’t occur if you’re using the money to help pay for college. However, you might owe taxes depending on whether it’s a traditional or Roth IRA and how much money you take out.
Keep in mind that 401(k) plans don’t come with these benefits. However, you might be able to apply for a 401(k) loan. Most of these loans have five-year terms, and the interest you pay goes back into your retirement account.
With a 401(k) loan, you can borrow half the vested balance or up to $50,000, whichever amount is smaller.
Before you decide to raid your retirement account, though, it’s important to consider the opportunity cost. If you take out a loan, you might be paying yourself interest, but you’ll miss the time your money could be in the market. Plus, if you withdraw the money, you’ll have to save even more later to make up for it.
Remember: There are loans for college. There aren’t loans for retirement. You might be better off getting a loan to help your child pay for college. Carefully run the numbers before putting your retirement at risk.
5. Use home equity loans
Putting up your home up as collateral to help pay for college might sound extreme. But if interest rates are favorable, it could be an option worth pursuing.
However, one of the risks of using a home equity loan is the fact that you could end up owing more on your mortgage than your home is worth.
Another potential issue is the fact that the money received from a home equity loan is counted when the federal government or school awards financial aid, making it harder for your child to qualify.
Finally, don’t forget that if you run into trouble with home equity loan payments, you could lose your home.
On the plus side, your home equity loan could have a lower interest rate than a student loan. And unlike Parent PLUS Loans, for which you can deduct up to $2,500 per year in interest, you can deduct up to $100,000 in interest for home equity loans.
Some private loans have low rates, especially if you have good credit. And they’re unsecured, so you won’t be putting your home at risk.
6. Review inheritances and encourage gift giving
When a loved one dies and gifts money to a family member or friend, it’s often with the intention that they’ll use it for a worthwhile purpose.
However, they might set up an inheritance so a child is unable to access the funds until they’ve reached a certain age, which could be well after college.
Consider contacting an attorney who can help you understand the terms of your child’s inheritance. You should review any hardship clauses your child might qualify for. Avoid inheritance loans or advances given their high interest rates and risky terms.
You also could reach out to living relatives and friends who might be willing to give to an education fund. Encourage grandparents, aunts, and uncles to forgo traditional birthday and holiday gifts in exchange for tuition assistance.
Set up a college savings plan, Roth IRA, or traditional savings account (for current students) where relatives and friends can deposit funds safely.
But realize that some of these assets, especially if they’re in your child’s name, can impact their ability to qualify for financial aid.
7. Teach them valuable money lessons
Finally, remember that paying for college isn’t an obligation for every parent.
If your finances don’t allow for it, be open and honest with your child about your inability to offer help paying for college.
Instead, assist them in looking for scholarships, applying for on- and off-campus jobs, or researching alternatives to pricey schools. As a parent, you can play an important role in the process without having to sacrifice your own money and savings.
Parents, consider all your options
Tuition costs continue to rise, and funding options remain limited. Parents who want to offer their child help paying for college have many questions to ask themselves.
Whether you’re considering low-risk options, such as Parent PLUS Loans, or riskier options, such as home equity loans, research the pros and cons before you decide how to fund your student’s college education.
Miranda Marquit contributed to this article.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.23% – 13.23%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 10.11%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|