When we consider helping our kids prepare for college, we often think about signing them up for SAT classes or driving along with them to campus visits.
However, for many parents, it 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 will need to weigh in on before the college year begins.
How to help pay for college
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 ensure you’re 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 each state-sponsored college savings plan. So be sure to read up on what your state offers and how your savings can add up over time.
Unlike other savings plans, 529 plans have high contribution levels which allow you to put away a lot more money for your child’s education.
When you’re ready to offer help paying for college, you can withdraw money for tuition and school related expenses (like textbooks and housing) without penalty. And, the money you take out isn’t taxed either.
2. Apply for PLUS and private loans
In 2014, 10.6 billion dollars was awarded to biological parents and legal guardians of dependent undergraduate students via the Parent PLUS Loan, according to New America. The PLUS loan is easy to apply for through the FAFSA website.
PLUS loan holders can take out an amount as high as the cost of tuition. And the loan is treated just like any other federal student loan program, with a few exceptions.
One exception is that your student loan bill comes as soon as your loans are fully distributed. Another one is that you may 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.
In the case that you may not qualify for Parent PLUS loans, there is also the option of going through private lenders and banks. In most cases, however, the interest rate is substantially higher and payment programs are not as flexible.
3. Co-sign student loans
When you decide on offering 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, more often than not they turn to private student loans as an option.
However, like other loans, private student loans require extensive credit history and good credit scores. These are qualifications many 18- to 21-year-olds haven’t quite met yet.
That’s where you, the parent, come in.
When you cosign a private student loan, you are essentially taking on liability for the loan if your child is unable to pay back their student loans. While your child benefits by an approved student loan application, you take on the risk.
Becoming a cosigner on a student loan can be a simple answer for how to help pay for college when you don’t have cash. However, 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.
4. Tap into retirement plans
US News and World Report stated earlier this year that only five percent of families used retirement account distributions to pay for college expenses.
Yet, for those parents who can afford it, using retirement funds can be an easy strategy to provide help paying for college.
For parents or grandparents under the age of 59½, early withdrawal penalties on IRA accounts do not occur if they’re using the money to help pay for college. However, you may still owe taxes depending on if it is a traditional or Roth IRA, and how much money is taken out.
Keep in mind that 401(k) plans do not come with these benefits. But, you may be able to apply for a 401(k) loan which has five-year terms, with the interest is paid back to your account.
With a 401(k) you may borrow half of the vested balance or up to $50,000, whichever amount is smaller.
5. Use home equity loans
Putting up your home up as collateral to help pay for college may sound extreme. But if interest rates are favorable, it could be an option to pursue.
However, one of the most dangerous aspects of using home equity loans is that your home loans can become upside down. That means you owe more on your mortgage than your home is worth.
Another potential issue is that money received from home equity loans is counted when the federal government or school looks into awarding financial aid. Therefore, it makes it harder for your child to qualify financially for aid.
On the plus side, your home equity loan could have a lower interest rate than a student loan. And unlike the Parent PLUS loan where you can only deduct up to $2,500 per year in interest, you are able to deduct up to $100,000 in interest for home equity loans.
6. Review inheritances and encourage gift giving
When a loved one dies and gifts money to a family member or friend, it is often with the intention that they use it for a worthwhile purpose.
However well-intentioned, they may 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 the individual attends college.
Consider contacting an attorney with expertise in inheritance or trust funds who can help you understand the terms of your child’s inheritance. You should review any hardship clauses the child may qualify for. Inheritance loans or advances should be avoided given their high-interest rates and risky terms.
Or, reach out to living relatives and friends who may be willing to give to an education fund. You can 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 account, or traditional savings account (for current students) where relatives and friends can deposit funds safely.
7. Teach them valuable money lessons
Finally, remember that paying for a child’s college is not an obligation for every parent.
If your finances do not 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 or traditional schools. As parents, you can still play an important role in the process without having to sacrifice your own money and savings.
Parents, consider all of your options
Tuition costs continue to rise, and funding options remain limited.
Parents looking to assist a child in affording their college dream have many questions to ask themselves when considering how to offer help paying for college.
With low-risk options such as applying for the popular Parent PLUS Loan, or riskier options like home equity loans, consider the pros and cons before you decide how best to fund your student’s college plans.
Interested in refinancing your Parent PLUS loans?Here are the top 6 lenders of 2018!
|Check out the testimonials and our in-depth reviews!|
|2.75% - 7.24%||Visit SoFi|
|2.57% - 6.39%||Visit Earnest|
|2.57% - 7.12%||Visit CommonBond|
|2.99% - 6.99%||Visit Laurel Road|
|2.74% - 7.26%||Visit Lendkey|
|2.89% - 8.33%||Visit Citizens|
Student Loan Hero Advertiser Disclosure
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.