Your son or daughter received their acceptance package from college (Woo Hoo!) and the bill for school is on the way. (Argh!) Now what? How in the world do you pay for school? Here is a summary of some options to consider:
Grants or Scholarships – One of the best ways to pay for school is in the form of a grant or scholarship. Why? Because you don’t have to pay the money back. Don’t be afraid to be aggressive in asking the college if there are grants or scholarships available for your student. Also, check to see if there are scholarships being offered from local organizations and also the parents’ or student’s employers. I know of a girl who followed this advice. She spent her entire senior year of high school applying for scholarships. Through her college and civic groups, she cobbled together several scholarships to fully cover her entire four years.
Federal Student Loans – Federal student loans are often the first loan options to start with. This is because the interest rates on Federal loans are generally fixed, and lower than other loan options. If the student qualifies for subsidized loans, the government will pay the interest on the Federal loans while the student is in school. As a bonus, if the student works for an eligible employer they may qualify for some or all of their Federal loans to be forgiven. On time payments for the Federal loan can also help the student to build credit. Undergraduate students can borrow $5,500 to $12,500 per year depending on the year of school so often Federal Student Loans are paired with other payment options. Check out www.studentaid.gov for additional details on Federal Student Loans.
529 Education Plan Distribution – If funds have been set aside for the student in the form of a 529 plan education account, taking a distribution from the plan may be a great way to pay for school. Be careful! Distributions from the 529 plan are considered income to the student in regards to the FAFSA form, so it may affect aide based grants or scholarships. Also, if the student is eligible for up to $2,500 American Opportunity Tax Credit, you will want to be sure that $4,000 of qualified education expenses are paid outside of the 529 plan (loans count). Check out: https://www.irs.gov/credits-deductions/individuals/aotc or IRS publication 970: https://www.irs.gov/pub/irs-pdf/p970.pdf for more information on tax benefits for education.
Payment Arrangement with the Institution – The College may have its own payment arrangements available that could be very cost effective. It will be important to understand any costs, and the amount and timing of payment to see if it is a good fit. You’ll never know if you don’t ask, so ask!
Credit Cards – Some credit cards charge reasonable interest rates and may potentially be a good alternative for helping to cover the college bill. Keep in mind that once you charge the card, you will need to begin making payments so it will influence your cash flow.
401K/403B Loan – Most 401K and 403B plans allow the option to borrow 50% of your retirement savings up to $50,000. Be careful! If you quit working or change employers, your loan may need to be paid back. If you cannot repay the loan, the remaining loan would be considered a distribution and could result in a hefty tax bill and possibly an early withdrawal penalty. It is important to review the plan detail to weigh the pros and cons of taking a 401K/403B loan. Also, it is helpful to understand the cash flow impact the loan will have as you repay it.
IRA Distributions – Money can be withdrawn from an IRA before retirement age (age 59 ½) without incurring a 10% early withdrawal penalty if the funds are used to pay for qualified education expenses. If the funds are withdrawn from a Traditional IRA, income tax will still be imposed on the distribution. If the funds are withdrawn from a Roth IRA, as long as the distribution is not more than what was contributed into the Roth IRA, it will be a tax-free withdrawal. Be careful! Keep in mind that any IRA withdrawals may affect the student’s financial aid because any payments made on the student’s behalf will be considered income to the student for the FAFSA form. Also, it is best to consult with your financial planner or tax preparer to understand any applicable tax consequences prior to making IRA withdrawals.
Cash-out Refinance of a Home or Automobile – If you have equity in your home or automobile, you may be able to take out a lien against property at reasonable interest rates. Keep in mind that a home refinance will have closing costs and some auto refinance loans do not allow for a cash-out. A great place to check may be with your local credit union.
Home Equity Loan or Home Equity Line of Credit – Unlike a cash-out refinance of your home, a home equity loan or line of credit, may not have closing costs; however, the interest rate on the loans may be higher than a home refinance. Be careful! If you pay off a home equity loan before three years, you may be required to pay a portion of the closing costs.
Resident Assistant Job – Having an RA job with the university could be a great way to save on school housing costs, as it generally will provide free housing and sometimes food or other benefits. In this role, the student will help enforce resident hall rules, provide programing, and support to the students that reside in the residence halls. As an added bonus, including an RA position on the student’s resume shows leadership skills.
Private Student Loans – Generally private student loans are looked at as the options of last resort since they often come at high interest rates. Generally these loans are taken out by the student and require a cosigner to obtain the best interest rate. As you look at private student loans, make sure you understand if the loan has an application or origination fee, repayment options, repayment term, and if there are any discounts for auto pay. Don’t be afraid to shop around and apply to various lenders at the same time.
There are many options to consider as you pay for education. Often a blend of the options is best to achieve the most favorable outcome. You are not alone in this journey. We welcome you to reach out to the JGUA team and we can work together to identify the best fit for you.