You’ve dug out all your savings and all other options to send your child to college, yet there’s still a deficit. Well, have you tried borrowing? If you haven’t, it’s time you did. Besides, what other option do you have?
However, you won’t borrow the money yourself. Instead, let your child do that. You already know debt can have a devastating effect on your finances, especially going into retirement. Several financing programs including federal student loan programs exist to help students to get the necessary funding to attend college.
Parents can help their kids apply for these programs and exhaust other options before considering borrowing. This includes work-study programs, working part-time, applying for scholarships, grants, working full-time but attending college part-time, etc. Nevertheless, here are some pointers if you consider borrowing.
Federal Student Aid Programs
These loans work by bridging the gap between the college’s actual cost and what you can afford to pay. The best part is these programs are available to everyone, including those that think their income may be too high and that they may be locked out of the application.
When seeking any type of loan, the cost of the loan tops the list. This includes interest rates and acquisition fees. Take a look at some of the cheapest federal student aid programs:
- Subsidized Stafford loans: Also known as needs-based loans, students can take a maximum of $3,500 during their first year. However, the limit increases throughout college life with interest rates topping 6.8% per year. Nevertheless, students don’t have to worry about making payments because the government does that. They’ll only start doing so 6 months after graduating, and the loan must be repaid over 10 years.
- Unsubsidized Stafford loans: The main difference between this loan and the one above is it’s not needs-based. Also, if the student is independent, they can borrow a maximum of dollar 1500 loan for starters but the limit increases during college life. If the student is dependent, they’re able to borrow a similar amount to that of the Subsidized Stafford loan.
The interest rate remains 6.8% per year, but the government won’t make any payments for the student under this loan. Students will have a 6-month grace period after which they’ll start paying their loans and must be done over 10 years.
- Perkins loans: This program has far more stringent needs-based requirements than the other two. First, a student cannot borrow more than $27,500 and can only borrow a maximum of $5,500 annually. The rates are low, at 5% and students will start making payments only after graduation.
Tuition Borrowing Options
- 401(k) plan loan: This will only work if your 401(k) comes with a loan feature and you can only borrow up to $50,000 or 50% of your account balance. This is a massive amount but borrowing from a 401(k) comes with its own repercussions.
For instance, if you no longer have vested money in the account, you won’t get the maximum benefits of the plan—even if you paid the full interest on the loan. Also, keep in mind the amount of money you borrow from the plan is pre-tax money, while the money paid on the loan is after-tax.
Then you’ll have to pay a 10% early withdrawal penalty and taxes should you switch employers before paying the outstanding loan in full.
- Federal PLUS loan: This is the best option of all the above. The acronym PLUS stands for Parent Loan for Undergraduate Students, and this loan is available to parents with good credit. That’s not the only good thing about it. The loan comes with fair terms, and you can borrow the entire cost of the student’s education apart from any other financial aid the student may qualify for.
The loan repayment will start 60 days after receiving the funds and you’ll have a maximum of 10 years to repay the loan and the interest. The College Board’s website offers more information.
- Unsecured loan: This is probably the worst route you can take when borrowing money for your child’s college education. First of all, the loan is unsecured, meaning there’s no asset such as a car or a loan to secure the loan. Therefore, the lender will charge a high-interest rate to cover the high risk. Also, you must have a good to excellent credit score to qualify for the loan. This shows the lender your creditworthiness.
- Home equity line of credit (HELOC): This type of loan allows you to use your home as a credit line. In this case, your home will act as the collateral and is an easy way to access a huge sum of money fast. However, the lender will only issue you up to 80% of the home’s value because lenders will want you to remain with at least 20% of the home’s equity. Also, because your home acts as collateral, you risk foreclosure if you fail to make the monthly payments.
Agreeing with Your Child How to Meet Payment Expectations
This is a great step toward encouraging your child to seek the necessary funds for their college education and also to get good grades while in college. Sit down with the child and get to know their expectations and also let them know yours as far as their college education is concerned.
You can draft a simple agreement that details how you intend on helping your child out. Some of the benefits of having such an agreement include:
- Your child should show good faith when applying for student aid programs, or you’ll not contribute a dime to their education.
- If they drop out, they’ll be on their own.
- Also, loan repayment for these programs typically starts 6 months after graduation. This will give them ample time to gather more money to pay off the debt.
The cost of getting a college education continues to rise, year after year, which strains many parents’ pockets and dims kids’ ambitions of going to college. However, when it comes to it, borrowing is an option you don’t want to pass by. If that is the case, the options outlined in this article will be of great help.