It’s okay, you can borrow money to attend college. Yes, you still need to figure out if a traditional four-year college education is what you want and need after high school (there are other options!), but once you’ve made that decision to go to a college, put some energy into figuring out how you’ll pay for it. Before considering loans, it’s time to discuss all the funding options available to your family—grants, scholarships, 529 accounts, work-study, cash you can commit during the year, even grandparent help. After you’ve totaled all those sources up, you may be left with a funding gap.
For the majority of American families (70%!), that means some kind of student loan choice. Colleges have grown so expensive and other mechanisms like scholarships and grants have not kept pace with the cost inflation, so loans are a natural need for most families.
If you need to borrow to pay for college, there are steps you can take to do it as cheaply as possible:
Read that line again and make sure this is your plan. Federal loans are the cheapest, most protected, most effective loan choice available. Even if you are a high-income family that doesn’t qualify for subsidized Direct loans, you should still use the unsubsidized version. Why? Interest rates are reasonable, and the student can participate in government programs like income-based repayment and loan forgiveness. The catch? The amounts available aren’t huge (only $5,500 for freshman year, and $27,000 in total).
It’s possible to cover the funding gap with just Federal Direct loans. If you can’t, keep reading.
Parent PLUS loans are available to all borrowers in huge amounts (which is why so many families use them), but they have high origination fees (4.3%) and a fairly high interest rate, currently at 7%. If you have good credit, you may qualify for a better deal through a local bank or even an online lender like Sallie Mae. The point is that you should shop around for a private student loan if your child is in need, because it may be cheaper to “go private”.
Many families don’t realize that most schools allow parents to setup a payment plan for the year—you don’t have to write a check for the full price of tuition at the beginning of the school year. You should pair this with creative cash flow discipline. Sending your child to college will free up money at home from what you previously paid for food and high school activities. You also likely have money in your budget you could transition to the college expense. How much is up to you, but many families can effectively round up $500/month for a payment plan with the college. Do that instead of borrowing on a loan and you’re saving real money!
Like the suggestion above, this falls into the realm of “pay less by not borrowing so much”. Work-study programs are part of the federal financial aid system, and they are a compelling way for college students to help pay for the cost of their education while in school. Colleges will have a variety of jobs available, everything from the information desk in the library to washing dishes in the cafeteria (that was one of my jobs!). Some of the jobs even allow you to learn or do homework while on the clock. There are important limitations: you can’t earn more than your “award amount” (part of the financial aid package), so this will generally not be a full-time job. If you have a funding gap in your financial aid package, make sure work-study is included before you consider more student loans.
The reality of taking on student loans to pay for college strikes most parents and students as they prepare to pay their fall semester of the first year. It’s alright, you will survive student loans if you consider all of your funding sources, minimize the quantity of loans you’ll need, and then take advantage of the cheapest ways to borrow.
Are student loans and your overall funding plan for college causing your head to spin? Reach out for a complimentary meeting to discuss your situation!
© 2019 Arnold & Mote Wealth Management All Rights Reserved