Question – My son got in Early Decision to a very expensive college and he accepted. I only have saved $80,000 and the school will cost $60k+ each year. What are the options to fund this? He didn’t get scholarships and I want him to avoid loans. Help!
Answer – I am a financial planner, not a magician. If you didn’t get merit-based aid due to your son’s academic achievement and didn’t get need-based aid based on your financial situation, there is no way to finance his college experience without a loan…. unless you can afford to pay the difference out of cash flow. Reducing your living expenses and/or temporarily suspending saving for your own retirement may be necessary. Note that I almost never advise tapping retirement savings to cover a child’s college costs.
With your son’s school of choice costing more than $60,000 per year, you are going to need more than $240,000 to cover the cost of his education. This assumes he finishes in 4 years, which isn’t a guarantee, or that graduate school isn’t in his future. With only $80,000 saved, there is a big funding gap. This seems like a case where you didn’t have an appropriate conversation with your son about college selection. Selecting a school that is within his academic grasp, meets his social criteria, and fits in your budget should have been done.
There are a variety of ways to borrow money to pay for college. The best college loan is the Stafford Loan (federal guaranteed student loans – www.studentloans.gov). The loan is in the student’s name, the rates are good, and the repayment terms are flexible. However, the most a student can borrow is currently only $29,000 over a 4-year period and many students don’t qualify to borrow this much. Thereafter, your son can take out a NJ Student Loan (www.hesaa.org) or look to a private lender for additional funding. Discover seems to have a reasonable private student loan program (www.discover.com/student-loans), although there are many decent choices. You’ll probably need to co-sign to get reasonable loan rates, which means that you’ll both be on the hook for repayment.
If you don’t want the loans to be in your child’s name at all, you can consider Plus Loans, which is also a federal student loan program (www.studentloans.gov) and allows a parent to borrow up to the cost of the student’s education so long as the parent’s credit is good. If you are a home owner, you can consider tapping the equity in your home by taking out a mortgage, refinancing your existing mortgage, or adding a home equity loan. Note that home loan interest is more likely to be tax deductible than student loan interest. Other alternatives include borrowing against your 401k or a cash value life insurance policy. A combination approach often makes sense.
Each of these loans has advantages and disadvantages so you’ll have to evaluate them carefully. Certainly fees, interest rates, and repayment terms will vary, but other differences should also be evaluated. For instance, it is nearly impossible to wipe out a federal student loan via bankruptcy, but these loans are discharged upon death of the borrower, which is the opposite of most other loans.
The student can also apply for scholarships separate from the school (www.collegescholarships.org) and get a part-time or summer job to help cover costs. Keep in mind that once your college savings is depleted, you may be in a better position to receive financial aid, so you need to keep applying annually. In fact, there are ways to structure your own finances to improve the chances of getting financial aid before your son graduates and seeing a financial planner now can still be helpful.