We all hope that our child throws a football exceptionally well, hits a softball really well, or makes a perfect score on their ACT so they earn a fully paid scholarship opportunity. Alas for most of us, all those trips to ball practice and all those nights helping with homework are not going to result in college being free for them or for us. That means actually paying for that college education.
First pursue every scholarship opportunity available and apply for financial aid with the schools that your student is enrolling in. Depending on your household income and your student’s academic performance, the school will present you some sort of offer ranging anywhere from them paying most of the costs of college to you and your student paying all of the costs.
Times have changed significantly since most of us were growing up in the 80s. Everything has gotten more expensive since then and the cost of college has grown substantially faster than housing, autos, or food has. Paying for college while working a series of $8 an hour part-time jobs likely will be insufficient to pay tuition, though it will certainly help if your child can pay for part of their way through school.
Students and families are having to borrow ever larger sums to finance their college educations.
In an ideal world, we anticipated this impending crisis and have been carefully setting aside money into investment vehicles since the children were in diapers and there is more than sufficient money to pay for college accumulated in the college fund. If that is you, then your problem is solved. If that is not you, you are not alone. You will have to choose a different path for your child’s education.
You can take out a federally sponsored parent PLUS loan at just 7.9%. They are easier to get and come with more flexibility than other loans. They allow you to defer repayment while your student is still in school and they have different options on repayment schedules. To apply fill out a Free Application for Federal Student Aid application.
A cheaper alternative is to take out a loan on your house. A home equity loan would average about 4.5% though interests rates recently have been climbing. The downside with a home equity loan or a home equity line of credit is that you are risking your house and over the last six years we have learned that home values can drop over time. If you already have a mortgage on your house you could very easily find yourself owing more money on your house than it is worth if property values were to drop.
We do not recommend you drawing down your retirement accounts to pay for college costs, but if you do take the money from your Roth IRA not your traditional IRAs or your 401(k)s. With a Roth IRA you will owe taxes on the earning but not the distribution. With a traditional IRA you would owe income taxes on the whole distribution. With a traditional IRA the government will allow you to avoid the 10% early withdrawal penalty if you are using the money for education expenses. If you are 59 and ½ or over and have had the IRA for at least five years you don’t pay taxes on the earnings there is not a penalty for any withdrawal but you do have to pay taxes on the distribution at your current tax rate. Ideally you would not tap a traditional IRA until after you are retired and are paying a low tax rate.
The least desirable way of financing college is to use your 401(k). Don’t do it. Too many plans have penalties for early withdrawals and the government penalties for early withdrawals border on confiscatory. A better way would be to borrow against the account. The danger with that approach is that if you lose your job, then you could have just weeks to pay back the money.
Keep in mind that college is not for everyone and if your child is not likely to get the degree it might be better for them to pursue other career pathways such as technical education or enlisting in the military.
If your child really is college ready, but your budget is not: then be honest with them and set some boundaries. Pay for a in state school and not a private or out-of-state school. Maybe a year or two of junior college while they live at home is an acceptable option.
Decisions made in the college years will affect their finances (and yours) for years to come so plan accordingly.