Kiplinger Unveils A Different Way To Plan For College
With the continual rise of higher education costs and the number of Americans with student loan debt at astronomical levels, questions about saving for the next generation's college career also grow in number.
Establishing a 529 College Savings Plan may sound ideal, but it is not practical for all parents.
For many, setting aside the "proper" amount for a child's education can rack up more than a home mortgage. Joe Heim said in a Washington Post piece, "[I]f we planned to save enough to pay for our kids’ tuition and board we should be putting aside $700 a month. For each of them. My wife and I had a good laugh. Instead of prompting us to start saving, this prompted us to start buying Powerball tickets."
Following the most recent publication of Kiplinger’s Personal Finance magazine, Benzinga followed up on the cost of college.
Sandra Block wrote a piece, titled “The Right Way to Borrow for College,” in which she outlined not only the standard advice ("Take federal loans first"), but some other options that may not readily come to mind. Two such options were taking out a Parent PLUS loan and a home-equity line of credit.
BZ: The thought of taking out a loan for my children's education, while there are loans specifically designed for students, befuddles me. Can you flesh out the benefits of a Parent PLUS loan? Is there some degree of security in the fact that they are specifically designed for parents?
SB: The benefits are that they're offered by the federal government, which means they offer more flexible repayment options than loans from private lenders. The interest rates are higher than those for student loans and some private loans -- right now they’re 7.21 percent -- but they’re fixed for the life of the loan, which isn’t the case with many private loans. In addition, borrowers who have less-than-perfect credit can qualify for a PLUS loan. But before taking out a PLUS loan, we encourage families to consider whether they should look for a less expensive school, because paying off a PLUS loan could prevent parents from saving enough for retirement.
BZ: What about home equity lines of credit? I've been told that it's unwise for parents to take out loans on behalf of their children, period. The Parent PLUS option sounds intriguing, but taking out home equity lines of credit?
SB: I’ve spoken with a lot of parents who have used HELOCs to help pay for college and believe they made the right choice. Interest rates on home equity lines of credit are quite low now, and some homeowners have a lot of equity they can tap. The downside is that if you have trouble repaying the loan, you could lose your home.
Also, a home equity line of credit is a great source of cash for emergencies, such as job loss or catastrophic illness. Using a home equity line of credit to pay for college would deprive you of this source of funds.
BZ: So, what situations and circumstances would make taking out a PLUS loan or using an HELOC worth the risk? I agree with your sentiments that considering these options should involve some serious discussions.
SB: I could envision taking out a PLUS loan for a modest amount to bridge the gap between student loans, financial aid and the cost of college, assuming you’re confident you can repay it quickly. Likewise, a home equity line of credit could provide a low-cost bridge loan. Suppose, for example, you have money in an investment portfolio (or 529 plan) to pay for college but don’t want to withdraw it right away; both these options would give you some extra time.
BZ: As a parent, in order to consider these options, what would my own financial situation need to look like in order to take that risk?
SB: You would need a solid plan to repay the loans ASAP. And you would need to be confident that repaying the loans would not prevent you from saving for retirement or meeting other financial obligations.
BZ: Do you have any financial advice for parents who have high school-age children considering higher education with a hefty price tag?
SB: They need to sit down with their kids and run the numbers. Someone I know did this recently: His daughter had applied and been accepted to an out-of-state school, which would have required her to take out private loans (which he would have to co-sign). He sat down with a calculator one night and figured out that upon graduation, her loan payments would top $800 a month. So he told her she would have to go to a less expensive school. She was devastated but is now attending an in-state school and loves it.
Because student loan payments are deferred until graduation, not enough families take this extra step.
Educate And Advise
When considering the cost of college for your children, remember these pieces of advice. As a family, discuss financial options candidly, even if the conversation is difficult. Talk about the cost of in-state vs. out-of-state tuition, the opportunities of merit- and need-based scholarships and federal versus private loans.
Regardless of your financial situation, whether you have a 529 savings plan in place or expect your children to pay their own way through college, keep the lines of communication open. Take it upon yourself to educate your family about the cost of college.
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