We all know that college application season is a stressful time, but now that employees' children have received their college acceptance letters, they'll be fully focused on work again, right? Wrong, because now they have to figure out how to pay that college bill! Hello, sticker shock. As spring turns to summer, the challenge of applying for college ends and the challenge of paying for college begins, keeping employees' minds off of work and on their wallets. Though that first college bill can be daunting, I always remind parents that they have 3 options to pay for college: they can tap their savings (their accumulated past income), pay as they go (out of their current income), or they can borrow (committing future income to pay down education debt). Parents can choose 1 strategy or combine all 3!
SavingsThe easiest way for parents to pay for college is to pay out of their savings. Of course, it took a lot of hard work to accumulate that savings account, but once the time comes to pay for college, the money is readily available and requires no reduction in lifestyle to access these funds. And if parents have saved for college in a 529, College Coach can provide tips on Using Your 529 Saving Plan to help parents best utilize this type of account.
Payment PlanIf parents don't have a large reserve of money on hand to pay 2 sizeable bills for the fall and spring semesters, but have some disposable income that can be devoted to tuition payments on a monthly basis, a college payment plan may be a good option. Most colleges offer a payment plan that allows parents to spread out yearly tuition over 10 monthly payments. The plans often charge a small enrollment fee ($20-$50), but the cost is minimal compared to finance charges on a long-term loan.
LoansIf parents do need to borrow, they should first be sure that their child has taken advantage of her full Subsidized and Unsubsidized Direct Loan eligibility ($5,500 total for freshman year). For remaining loan needs, parents have 4 alternative financing options:
- Direct PLUS Loan: Parents with satisfactory credit can borrow a Direct PLUS Loan from the federal government. The loan has a 7.9% fixed interest rate and can be used to finance any amount up to the total cost of the school less other financial aid. Repayment begins immediately, but can be deferred upon request.
- State Loan: Many states offer education loans with terms comparable to the PLUS Loan. We help parents investigate loans from their home state and the state where their child's college is located.
- Private Loan: Many private banks offer education loans to students and parents. Though terms differ between banks, most private loans have variable interest rates, which are a riskier option for long-term borrowing.
- Home Equity Loan: In this market, parents may be able to access a very low fixed rate loan through their home equity. They should just be sure that they plan to stay in their home a while and don't have other uses for their home equity in the foreseeable future.