Affording the College Education Your Child DesiresSubmitted by JMB Financial Managers on May 27th, 2021
Most parents want to fund their children’s college education as much as they can. In fact, 49% of parents want to pay 75% of their child’s school costs. Yet many parents find that they make too much money to qualify for any substantial financial aid but can’t pay the tuition out of pocket without selling their car or house or dipping into their retirement savings. If you fall into this category as a parent, what do you do? Don’t panic, there are plenty of ways to afford the education your child desires including:
- Federal parent loans (FASFA)
- Private parent loans
- College savings accounts (529 plans)
- Financial aid and assistance
- Home equity
Let’s take a look at each of these in more detail.
Federal Parent Loans
You likely remember taking out student loans when you went to college, but did you know that you can take out an education loan as a parent? It starts with filling out a FAFSA, which also provides opportunities for potential grants, work-study arrangements, and scholarships. Filling out the FAFSA means you can apply for a federal direct PLUS loan.
A federal direct PLUS loan has an optional payment deferment for while the student is in school. Interest will still accrue during this period, however. This loan type also comes with flexible repayment schedules. You can only borrow the cost of your child’s tuition after subtracting any other financial aid or assistance received.
Some downsides are, there is a fixed interest rate at 5.30% (if the loan is taken out before July 1, 2021), a 4.23% loan fee, and an annual tax deduction limit of $2,500.
Private Parent Loans
Private lenders can also be loan providers for parents. If you are in a strong spot financially and have a high credit score, you can potentially qualify for lower interest rates than you would get from the federal loan option.
There are many private loan companies on the market. Some of the most reputable organizations with lower interest rates are, College Ave, SoFi, Advantage Education Loan, and RISLA. A list of the best parent loan offerings can be found on nerdwallet.
A 529 college savings plan can be established for a designated beneficiary and are offered on a state level. There are no tax deductions available on contributions, but they do allow for deferred taxation on earnings and, when certain requirements are met, can be exempt when withdrawn to pay for education expenses.
There are two types of 529 plans, a college savings plan and a pre-paid tuition plan.
College Savings Plans
College savings plans are established through qualified providers that allow savings to accumulate and often include various investment options. Many college savings plans are set up as a family of mutual funds, meaning that funds can be diversified among various investments. As with any investment plan, you should carefully review a potential 529 college savings plan with your financial advisor.
Pre-Paid Tuition Plans
For 529 pre-paid tuition plans, all contributions go directly to the purchase of credit with a college or university. The credits accumulate and are then applied to tuition or other qualified education-related expenses. These plans include a formula that is established up front to determine how many credits need to accumulate to cover tuition based on the current rate of inflation and minimum interest rates. Occasionally, the sponsoring institution will guarantee tuition coverage even if the tuition exceeds the prediction from the formula.
The major downside to pre-paid tuition plans is that the credits can only be applied to schools within the state, for state-sponsored plans, or schools participating in the program at a specific private institution. Many states have been rethinking the guarantees typically provided with this type of plan, so your credits may not be sufficient.
Financial Aid and Assistance
When deciding how to pay for your child’s higher education, you should understand how financial aid programs work. Financial aid availability is generally based on assets that are held under the student’s name. This means that any assets held in your name are exempt from the financial aid eligibility requirements. However, assets held in trust for your child could affect financial aid eligibility.
There are several grant options available through the federal government. Grants don’t require repayments and are usually paid to students through the college or university itself.
- Pell Grants: available for undergraduate students.
- Federal Supplemental Educational Opportunity (FSEOG): grant for low-income students pursuing post-graduate education.
- National Science & Mathematics Access to Retain Talent Grant (National SMART Grant): An aid program for college juniors and seniors majoring in math, science, or engineering.
- Teacher Education Assistance for College and Higher Education (TEACH) Grant: for undergraduate or post-graduate students at participating schools and/or programs. This grant also requires the receiver to agree to complete four years of qualifying teaching work. If the student doesn’t complete this obligation, the grant turns into a loan that must be repaid in full, including interest.
Student eligibility will be determined with application to the grant program, but the grant websites list the requirements for you.
Utilize Home Equity
If the housing market is high and mortgage rates are low, you could utilize your home equity to help pay the tuition bill. Some options for unlocking your home equity are, a home equity loan (a.k.a. a second mortgage), a cash-out mortgage refinance, or a home equity line of credit.
The benefit of using home equity is that it often ends up being a better deal than other financing options when you examine the numbers. However, it also comes with a high-risk factor; it places a highly valuable asset in a precarious position where a decline in value plus missed mortgage payments could result in its loss.
Talk to Your Financial Advisor
When deciding how to fund your child’s college education, contact your financial advisor for assistance with determining what method is right for you and your unique situation. They can also provide you with additional solutions not mentioned above. Paying for college can be stressful but supporting your child’s future is definitely worth it.
For additional information see our related articles:
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Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan.
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.