Having your child get into college is easily one of your proudest moments as a parent. But with the average cost of attending a four-year private institution at $33,480, figuring out how to pay for college is probably one of the most stressful.
Luckily, there are many ways parents can help fund their children’s education that don’t include draining your savings. Here’s everything you need to know about helping your kid pay for college.
4 student loan options for parents paying for college
While students can take on a lot of the responsibility when it comes to paying for college (i.e., applying for scholarships), parents can provide financial support in a number of ways.
1. Take out federal loans
The first step for any prospective college student should be to fill out the Free Application for Federal Student Aid (FAFSA). This will determine how much aid your child will get in a variety of forms, including grants and federal loans.
But if your child is considered a dependent, you’ll be responsible for completing a portion of the FAFSA form — providing your income, assets, and other financial information. This will open up the possibility of a Parent PLUS Loan, although that doesn’t mean you are obligated to take out a Parent PLUS Loan, just that it’s an option.
A credit check is completed for this type of loan, so you can’t have an adverse credit history. You can borrow up to the total cost of tuition, minus any other financial aid, and will always have a fixed interest rate (7.00% for the 2017-2018 academic year) since the loan is issued by the government.
Unlike other federal loans, Parent PLUS Loans are in the parent’s name, and it’s your responsibility to pay it back as soon as it’s fully disbursed.
How to get a federal loan
Your child can go ahead and do the work of filling out the FAFSA, and you can include your information. Once that is done, you can sign in to StudentLoans.gov to request a PLUS loan and then follow the instructions, which will depend on the school. Then, if you are eligible, you will have to sign a Master Promissory Note agreeing to the loan terms.
2. Consider private loans
Even if your child has scored some scholarships and taken out loans in their own name, and you’ve borrowed federal loans, it still might not be enough to cover the total cost of education. That’s when you might look into private student loans for paying for college.
There are two ways you can get private student loans:
1. Take out the loan yourself
This means you will apply for a loan through an individual lender that will not be in your child’s name at all. Interest rates, eligibility, and the repayment terms will all be determined by the lender since it is not a government-issued loan.
2. Cosign your child’s loan
When it comes to statistics on parents paying for college, 93% of private student loans were cosigned, according to data from MeasureOne. With this option, technically your child is the borrower, so they are responsible for paying back the loan. But if they have trouble paying, the burden will then fall on you.
Even as a cosigner, your credit score, and other financial information will be taken into consideration. Again, interest rates, eligibility, and the repayment terms will all be determined by the lender.
The good news with private loans is that you can generally borrow much more than is allowed with federal loans, and there’s no deadline for when you need to apply. Unfortunately, interest rates can be higher, and you might have to start paying while your child is still in school.
How to get private student loans
Whether you are the cosigner or primary borrower with a private student loan, you will need to provide some financial documents. While each lender will require different information, it’s best to have the following ready before applying:
- Social Security number
- Personal information, such as telephone numbers, date of birth, and home address
- Gross annual income
- A list of any assets and their values
- Monthly rent or mortgage
- A copy of your latest tax return
- Employment information, including a recent pay stub (within the last 60 days)
- Secure a personal reference
3. Set up a 529 Plan
One of the popular ways parents are paying for college tuition is by starting early with a 529 College Savings Plan. Through this savings plan, you can contribute more than a traditional savings plan and take out the money to pay for college-related expenses without any penalty or tax.
With the money invested, you can choose between stock, bond, mutual, or money-market funds, and even choose a portfolio based on the age of your child. It’s best to invest as early as possible.
If you started investing $100 a month when your child was born, you would have close to $50,000 by the time they were 18. That’s nearly $10,000 more than a traditional savings account.
It’s important to remember, though, that every state offers a version of the plan, and the exact rules and benefits do vary.
How to start a 529 savings plan
Starting as soon as possible, look up your state’s 529 plan or compare plans at SavingForCollege.com. You can also reach out to your financial advisor to set it up for you.
All you’ll need is your personal information, such as Social Security Number and date of birth, available, as well as a transfer from your checking account. Some states might have a minimum. Then just set up an automatic contribution each month to ensure you’re funding the account.
4. Use your retirement
If you have some leeway with your retirement accounts and aren’t worried about your future finances, you could tap into your retirement account to help pay for college. This option is only available to parents under the age of 59½ with an IRA account. You will not face early withdrawal penalties but might have to pay taxes on the amount depending on whether you have a traditional or Roth IRA.
This option isn’t available with a 401(k), but you might be able to get a 401(k) loan. Check with your retirement accounts for your options and what it would cost you to do this.
How to use your retirement to pay for college
Choosing this option when paying for college will depend on what retirement account you have set up and its limitations for early withdrawal. It’s best to reach out to the institution managing your retirement account to find out exactly how to request a withdrawal to pay for your child’s college education.
Your human resources advisor might also be able to guide you on the process if your account was set up by your employer.
Then you must decide which lenders you will apply with and go through their processes, many of which can be done online. You can shop around and get quotes from the banks offering private student loans.
Are parents legally obligated to pay for college?
The short answer to this question is no. Your child can find many ways to finance their education through scholarships, federal loans, grants, and more. But you are legally on the hook in few scenarios.
1. If you take out a Parent PLUS Loan
This federal loan is entirely in your name and cannot be transferred to your child unless you refinance with a private lender. That means you are responsible for all payments.
2. If you take out a private student loan
Like Parent PLUS federal loans, any private student loan that you take out is your responsibility, as it is in your name.
3. If you cosign a loan
Although your child is technically the primary borrower, you would be legally obliged to repay the loan if your child is unable to.
4. If you’re divorced
While this varies by state, if you’re divorced you might have to pay for your child’s tuition. This typically happens when one spouse is required to make child support payments, and a court determines they are also responsible for helping to pay for college tuition. Consult your lawyer if you’re paying child support to determine whether you’re legally obligated for your child’s college costs.
You have options when it comes to paying for college
There are a lot of choices out there for parents paying for college tuition, and this can be overwhelming. It’s best to start the discussion of financing your child’s education early, so everyone knows what they’ll be responsible for in the process.
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