College bills are rolling in. Now what?
Inevitably, this time of year, I get calls from parents, most of the time not ones that have been working with me, worried and panicked on where they are going to get the money to pay their child’s college bill. People come to me hoping and thinking that I have some miracle, some words of wisdom,up my sleeve that will enlighten and help them with this endeavor. Well, I’m sorry to say, I don’t.
This isn’t rocket science. You get money from 3 places: Income, savings or by borrowing. The first 2 are straightforward and, unfortunately, most families have little to draw from going down those avenues. So that leaves borrowing. to pay those colleg bills. Let’s look at our options down this path (And be sure you read to the end of this blog since the final point is the most important of all, for those of you that aren’t faced with this dilemma yet):
1. The Federal Government – Direct Student Loan
Your child always can borrow using the Direct Student Loan and, given the low interest rate and that this truly is your child’s loan and no cosigners are needed, this should be taken advantage of. Here’s the issue. A student can only borrow up to $5,500 the first year. Yes, this amount hasn’t changed since I attended college 30+ years ago, which is mind boggling, but something we have no control over. Inevitably, there is usually more that needs to be borrowed. See #2, 3, 4 & 5.
2. The Federal Government – Parent PLUS Loan
The good news (Which I think is not such good news) is that you can borrow up to the cost of attendance, as long as you meet their credit worthiness criteria (Which is relatively low). The not so good news is that the interest rate, this year, is 7.6%. You have the choice to start paying it back immediately or deferring the payments, but know, that if you defer, interest will accrue (And, by the way, interest is accruing anyway). My biggest fear about this option is that you borrow huge sums of money and the parent has yet another mortgage to pay on their hands, creeping into their retirement years, or potentially delaying their retirement in definitely.
3. The College
Yes, some colleges have their own borrowing plan. As an example, Wash U allows parents to borrow money to pay for college at an interest rate of approximately 5% (Which of course can change over time). Look to see if your college offers this. Not many do, but it is worth the ask.
4. Borrow against an asset
Your home equity line of credit, a life insurance policy…etc. The interest rate may be the lowest of all of these options, but you are on the hook for all of it (As you would be for all borrowing options). Default and you may lose your asset.
5. Private loans
This is where the interest rate can sky rocket. Parents seem to be under the impression that their child can borrow money, on their own, without a cosigner. I hear this frequently. We told Johnny that we will pay up to the state school cost of attendance and the remainder will be his to fund. Although there are some places where a cosigner is not required, it is rare and the student has to meet certain conditions. The more likely option is that the student can take out the loan but a cosigner is required. What does this mean? That means that the cosigner’s credit is affected and if the student defaults the cosigner is on the hook. And, the cosigner has to have good credit to cosign. Essentially, this loan is your responsibility.
I think you get the gist of what I outline above. The most important point here is this. Be proactive. Set your financial boundaries up front, early on, when you are doing your college search. Understand at that time what options you have to borrow, if you even want to go down that route, and select colleges that fit your financial criteria. Although Johnny may be thrilled with be accepted to and heading to this college, down the road, you and he can be crippled with debt and regretting that you didn’t heed my advice early in your process.