Financial Planning Paying for College

Beyond Student Loans

A four-year private education can now cost up to $180,000. While the cost of an education is rising, financial aid for students (Perkins Loans and Stafford Loans) is decreasing. Congress cut government-sponsored student financial aid by 12.7 billion dollars, so it is now necessary for more families to find supplemental funding.

 Here’s how you can begin to look for supplemental college funding.

Pre-Planning

The best path for funding college is to plan ahead! Weigh the pluses and minuses of each strategy:

  • Saving: Socking money away in a bank account is a solid plan, and the money will be there without having to borrow and pay interest, but present day interest rates are not keeping up with the increases in college costs.
  • Investing: Stocks and bonds usually give bigger money returns, but investing requires a certain amount of savvy and paying taxes on investment income cuts into what will be available for education.
  • 529 College Savings Plans: Please see our article “College Investing with 529s Can Be Easy.”
  • UPromise: With Upromise, families can automatically save money for college while making everyday purchases at grocery and drug stores, gas stations, restaurants, retail stores, and online shopping sites. In addition, it allows its account owners to invite friends and relatives to contribute free of charge to save in the name of the student through everyday purchases and/or through their Ugift program, a 529 plan for birthdays, holidays, and other special events. All you need to do to get started is register and add a grocery card or credit card to the account to start the easy savings plan. Every time you use either the grocery card or the credit card to pay for your purchases, you automatically add money to the account of the lucky student. Nothing can be easier than this! Check out UPromise today. The sooner you get started, the better potential savings will be!

 

  • Coverdell Education Savings Accounts: Much like an individual retirement account you have control over this investment, and the monies can be used for k-12 education costs as well as for college costs, but many of the benefits of this account could expire in 2010 unless they are extended by Congress.
  • Prepaid Tuition Accounts: Some states such as Florida allow you to purchase future tuition at present-day in-state costs at eligible colleges. Because the present-day tuition costs are usually lower than future costs, there is immediate savings. If, however, your student decides to go out of state, you can still withdraw your money, but because you will have to pay present-day tuition, you lose your tuition savings benefit.

Parent Aid

  • There is a way for students’ families to borrow money at a reduced rate through government PLUS loans (Parent Loans for Undergraduate Students). These loans are not capped, and you can borrow as much as the student needs. Still, the interest rate on PLUS loans is high, and using fixed-rate home equity loans may be better.
  • Parents may also take monies from their retirement accounts to lend to students at reduced interest. Parents should be sure to notarize such loans and ask for a payback schedule from their student.
  • Co-Signing – Parents’ credit ratings are usually better than a student’s so students can get better loan rates if their parents will co-sign. Co-signing means the students will be the primary borrowers and be responsible for the payback of the loan, but a parent’s signature on the loan guarantees that if the student does not pay the loan, the parent will be responsible. With this assurance banks will loan at a better rate. However, parents should not co-sign if they feel their student will not take responsibility to pay the loan back.

Private Loans

More and more families are looking at private lenders to fill the money gap. In fact, private lending is up 15% over the last decade. Many colleges will provide you a list of preferred private lenders. This list should only be a starting point. First, just because your college recommends these loaning institutions does not mean they have the best rates. Second, no college may legally require you use their list of lenders. But, you can start with your college’s list. Then compare loan terms, interest rates charged over the course of the loan, and fees for the loan, with other lenders, including your local banks and other large lending institutions.

A helpful site with a list of all college aid institutions can be found at FinAid.org.