The Parent Portion of the College Education Expense
The expense of a college education rivals, and often surpasses, that of a residential mortgage, especially if the cost involves more than one child. Yes, costs are steep, and with 43% or more of the cost covered by the family (according to Sallie Mae), parents tend to be the principal source of college funds.
According to a February 11, 2019, article in Credible, the average annual: in-state cost-of-attendance on campus at a public university was $25,980; on campus at an out-of-state public university was $41,950; and, on campus at a private non-profit college was $52,500. Thus, the average 4-year cost-of-attendance for one child, assuming no increases (yeah, right!), ranged from $103,920 to $210,000.
Conventional thinking suggests parents have several options available to them. Technically, they do. But, none of the options actually benefit the family. Four conventional means of savings include the following:
1. Start a savings account early.
While it’s never too late to start a savings account, the earlier the better. Suggested accounts include those at a bank or credit union, as they are insured and safe. However, the return on your money is negligible. Even were you to begin an account at conception, the likelihood of having the money needed to cover your portion of the expense is low.
Another suggested option is the 529 College “Savings” Plan. The drawback that most parents and grandparents overlook is that these are investment accounts, not savings accounts. Even though there may be some tax benefits, the money can be lost, it’s outside your control, and subject to access and use restrictions. And, if used for non-qualified expenses, taxes and penalties are imposed.
2. Complete the Free Application for Federal Student Aid (FAFSA).
A critical step with respect to federal student aid, it provides access to “free” money (i.e., grants, scholarships, and awards) and qualifies the student for federal student loans. Be sure to submit the FAFSA, as it may make available aid of which you were unaware.
3. Take Out a Parent Loan.
Both Parent PLUS loans and private student loans typically are available to parents. Parent PLUS loans come with one of the highest rates for federal loans, as well as an origination fee exceeding 4%. Repayment begins within 60 days following distribution of the loan and, as you must apply for a new loan each academic year, you may have four or more loan payments for the better part of a decade.
4. Take Out a Private Student Loan.
Private student loans for parents are in the student’s name, but cosigned by a parent. Typically, they have lower interest rates than the Parent PLUS loans and multiple repayment plans. And, they can assist in establishing good credit for your child.
Do not withdraw retirement funds from your retirement savings account(s). Likewise, do not take out a Home Equity Line of Credit or refinance your residence for the cash. Doing either can have a variety of negative impacts, not only on your retirement plans, but on the amount of financial aid for which your child may qualify.
While many of our clients do utilize one or more of the above options, not one of those options address the financial vehicle we recommend for college savings purposes. The vehicle we recommend: leaves you with access to and control of your money; is protected from market downturns; has a guaranteed return, compounded annually; and, will not have a negative impact of eligibility for financial aid.
If you’re interested in learning more about the vehicle we recommend, please contact us to schedule your no-obligation evaluation. We are here to help!
