Paying for College
So you have been accepted to a college and you have sent in your deposit. At this point you are ready for the next step – figuring out how to pay for this 800 pound gorilla, college. You might be asking yourself what are my options and what student loans are available to me to pay for college.
To begin, you need to first determine your true budget or how much out of pocket expense you will need to budget for. I consider your true budget the total yearly out of pocket cost for your child to attend college. To calculate your true budget, make sure you have your official financial aid award letter handy. Start with the Cost of Attendance (COA). The COA is the estimated total cost for your child to attend college for one year. The COA may include tuition and fees, books, supplies, transportation, miscellaneous personal expenses, and room and board fees (other cost may be included if you are a student with a dependent, you are going to study abroad, and fees associated with students that have disabilities). Next, please subtract any grants and scholarships (free money) you might have received from the COA. If you will be taking Federal Stafford loans or any work study (Loans/Self Help) offered by the school, please subtract this amount from the COA as well. What is left is your True Budget or out of pocket expense.
Cost Of Attendance $49,032
Loan/Self Help ($9,500)
Total Need Met ($30,800)
True Budget $18,232
In some cases colleges will list a Federal Parent (PLUS) loan on the award letter as additional aid to cover your True Budget. I would not consider this as aid from a college and I would not recommend taking the Federal Parent (PLUS) loan.
Let’s discuss the basics forms of paying for college. Since working with over a thousand families I have seen many different and unique ways to pay for college. Below are seven basic ways to pay for college:
Paying for College: Options
Option #1 –Current Savings & Investments
Today, this is the best option. But in most cases unrealistic for many families. However, if you can afford to write one large check to cover the remaining balance through current savings and cash flow, please do so. There might be a future time when the college loan rates are less than investment rates, and this strategy might not be as beneficial. With high loan rates on the horizon and investment rates still low, paying for college using cash flow and savings is best if you can afford it.
The only downside of using your savings and investments to pay your child’s college is that you are taking most of the financial risk if your child does not graduate from college. You are prepaying college with the hope they will graduate. Unfortunately, you are reducing your child’s accountability or responsibility. Moreover, with graduation rates hovering around 37% for a four year degree in the United States and more students leaving college before they earn their degree, using current savings and investments can be very risky.
Option #2 – College Monthly Tuition Payment Plans: Cash Flow
Most colleges allow parents to make monthly payments to cover the remaining balance (True Budget). Essentially, colleges will divide your remaining balance equally using an installment plan lasting twelve months or less. Many colleges do not charge interest while you pay your balance using this short-term installment plan. The colleges basically deduct your payment amount from your checking or savings account each month. A few colleges also allow you to charge this on a credit card. However, many installment plans do have an enrollment fee (less than $100). For example, let’s use a figure of $18,323 as our unmet aid or remaining balance. A college may allow us to pay this amount over 12 months or $1527 per month. The payments depend on what, if anything, you put down and when. Make sure you ask about all cost and fees before starting a tuition installment plan. The installment plan is a good alternative to paying for college if you cannot afford a large lump sum payment at the start of the semester, but you have the cash flow to cover the monthly payments.
Again, the only downside to using your cash flow to pay for college is the potential risk of using your hard earned money on a risky investment like finishing college. I know what you are thinking: “Not my child. She/he will graduate.” Believe me, I have met many students that were bright, smart, intelligent, and motivated when they entered college, but never graduated. There is nothing more devastating to a family than paying for college and a child not graduating.
Option #3 – College Loans
There are many different types of loans available for you to consider. This article would be too long and too boring for me to share with you all the loans that are available and the pros and cons of each loan. For my clients, we produce a Loan Booklet that goes into detail about all your loan options and the best providers. I also write about the pros and cons of each type of loan in my book, “College Aid for Middle Class America: Solutions to Paying Wholesale vs. Retail.” (You can even download the first four chapters for free).
I will offer you a quick recommendation. Please start by taking the Federal Stafford Loans. You will need to sign the master promissory note and complete loan counseling online at www.studentloans.gov. Also, a good resource for you to compare private student loans is www.simpletuition.com. Be careful and know what you are taking before you sign on the dotted line and remember that educational loans can never be discharged through bankruptcy!
Option #4 – Home Loan: Equity or Lines of Credit
With low interest rates compared to other college loans and a potential tax deduction, using an equity line of credit or home loan has become very popular. Moreover, if your college requires you to complete the CSS Profile form or their own institutional form and home equity is used to calculate your Expected Family Contribution (EFC) number, then borrowing money from your home might be a great idea! Colleges that just use the FAFSA form do not use home equity (primary residence only) in their EFC calculation. By taking equity out of your house, you could qualify for some financial aid from the college next year because you are decreasing your assets in the expected family contribution calculation.
There is always another side of the coin with any option. For many, home equity is a source for emergency funds that can be used in times of need. Many small business owners also use their home equity to cover month-to-month cash flow fluctuations. If you tap your equity to pay for college, this source of emergency funding is no longer an option. In addition, since the home mortgage crisis began in 2008, home values have dropped and fair market values of homes have changed dramatically.
Option #5 – Downsize Your Life Style
I am not a frugal person, but I do believe in value. I want my life to be better next year and I am not one to preach “live below your means.” Sometimes making minor changes to your life can have a huge impact. For example, a pack of cigarettes can cost anywhere from $5.00 to $11.00 depending on where you live. If we use $6.50 as an average cost of a cigarette pack and you smoke a pack a day, this equals to $45.50 per week. That equals to $2366 per year that could be used toward college. Moreover, let’s say you spend $5 per day on one of these miscellaneous items: coffee, energy drinks, lunch, snack, lottery tickets, candy, etc…If you could cut this $5.00 item out of your daily routine, you could save $1820 in college cost. How about going on a “staycation” instead of a vacation this year? The average person spends around $2,200 per year on a vacation and that does not include lost wages. In this example, just a few changes added up to $6,386 that could be used toward college. Do this for four years and you have $25,544!
Paying for College: Students Work
Option #6 – Students Work
This is one of my favorite options – maybe I should have put this as option #1! Can your child work 20 hours a week in college and still get good grades? Of course and I will prove it! UPromise Inc. found that students working 10 hours a week “appears to have positive impacts on student performance.” Moreover, the Journal of Student Financial Aid found that students who work eleven to twenty hours per week had higher GPAs than students that did not work at all! These students seem to keep better focus on their task, have less time to party, and have better time management.
If your child works only 20 hours per week at $8 dollars per hour, he/she would earn $160 per week. That equals around $640 a month or $7680 a year that can be put towards college cost! What a huge impact a student can make by working only 20 hours a week.
The lesson I get from these studies is that students can do well academically and have a positive impact on their lives only working 10 to 20 hours a week. (Not so surprising, UPromise Inc. also found that a student working 35 hours or more per week was “counterproductive.”)
The only time I would not recommend a student to work is if they are receiving a lot of need based financial aid in the form of gift aid (free money, not loans). Any earnings above $3000 your child makes, 50% of these earnings is deducted from any financial aid the following year. If your child receives a lot of need based aid, I would only recommend he/she earn up to $3000. A great resource about this strategy is a book by Zac Bissonnette, Debt-Free U and of course you can contact me as well.
Option #7 – Using a Combination of Options 1-5
Once size does not fit all, and you can use a combination of all the options mentioned above. Using educational loans to create some “skin in the game” for a student works great as long as we can help pay off some/all of those loans once the child graduates. For more information about paying for college and reducing the cost of college, please call or email me for a free consultation.