Your kids are planning ahead for college. While this is probably a very exciting moment, you should also consider what’s the best way to go about it financially.
College prices have gone up since many of us have left the collegiate world. In the academic year of 2019-20, families spent an average of $30,017 on college, according to Sallie Mae. This may be more challenging than you thought. Even kids who do their best to earn money and get scholarships, grants, and government loans, may come up short.
Like most parents, you want your kids to reach their goals, and some goals require a college education. The question is, what’s the best way to fund it? Should you pay all or part of their bill? Should you use money you have on hand or take out a loan? How about co-signing on a private loan with your child? Or is it better to just offer your kids advice and send them on their way?
"It’s really hard for a student and a parent to understand what the resulting monthly payment will be from four years of college, where the student is doing some borrowing and the parent is doing some borrowing, or they’re doing some together.
I recommend that families not just make decisions about what to borrow year by year but they keep track of what they’re accumulating and what the resulting monthly payment obligations are going to be for the student and the parent so that they make sure they aren’t getting outside of the zone of what they can afford." - Kevin Walker - CEO and Founder at Collegefinance.com
Here are the three main ways you can help your child plan for college, and what you should consider before deciding what’s best for your family:
Directly Pay for College
If you have funds available, you may want to pay some or all of your kids’ tuition.
Pros: This is the most straightforward way to help your kids go to college and avoid the hassles of applying for student loans. If you have cash in a savings account or other nest egg, you pay the bill and it’s done. Neither you nor your kids are in debt or need to worry about payments, and your credit score doesn’t take a hit.
If you take out a loan in your name, you may have an easier time qualifying and getting a lower interest rate than your kids would. For example, home equity loans can be relatively quick and easy to qualify for.
Cons: If you take out a personal loan or home equity loan, you start making payments immediately. There is no deferral, as with a student loan. Also, it’s human nature to value something more when a person has to work for it, or when they have more at stake. If you pay the entire college bill and your child doesn’t meet your scholastic expectations, what then?
In addition, you should consider whether you can really afford to pay the bill yourself. You should be making headway on your own retirement funding and have an emergency fund before you drain your accounts to pay for your kids’ college. After all, your children can get college loans, but there’s no such thing as a retirement loan.
Co-Sign a Loan
Once your child has exhausted the possibilities of scholarships, grants and federal student loans, they may turn to private student loans. Most students don’t qualify for private student or other loans at the most favorable rates on their own. Students who have just graduated from high school generally don’t have the income and credit scores lenders require. However, if you co-sign, lenders will usually be able to offer you a loan - promising that if your child doesn’t pay as promised, you will.
Pros: Co-signing can help your child get a private loan that he or she wouldn’t have qualified for alone. If the payments are made as agreed, the loan in good standing can bolster your credit score.
Cons: You must make the loan payments if your child doesn’t. If your child files for bankruptcy, the debt transfers to you. You may even have to pay if your child becomes disabled or dies, depending on the terms of the contract.
"On the one extreme, it’s entirely the parent’s responsibility, and then it moves to be the parent’s responsibility over time if they’re financing a loan over a longer period of time. And then, with the private student loan, it’s a shared responsibility between the students and parent as a cosigner. Where the family can come out on that spectrum of choices, they may even avail themselves with more than one of those, that’s where the one size doesn’t fit all.
If they decide to involve the student in some of the parent’s borrowings, with the parent as a cosigner or hoping that someday down the line the student, when graduated, will help the parent pay some of their debt which they took on to pay for their education, they should make that clear upfront to the student." -Kevin Walker - CEO and Founder at Collegefinance.com
Even if your child does not default, your credit is affected by the fact that you cosigned on a loan. The credit check for loan application will create a small, temporary dip of 5 to 10 points in your score. That’s probably not a problem unless you are planning to apply for a mortgage or other credit immediately. The co-signed loan will also show as debt on your credit report, increasing your debt load and your debt-to-available-credit ratio. And if the loan goes into default, your score will suffer.
Offer Advice
Whether you can afford to help your kids financially or not, your advice can help.
You might advise students to get as many college credits as possible before heading off to college; for example, by taking college-level classes during high school. That way they can also develop skills and interests that could help them get scholarships and grants.
When your child is ready for college, they may consider taking credits at a community college before they transfer to another college (Some community colleges now offer four-year degrees). Recommend that they compare tuition prices and other costs before they choose a college. The best college is not necessarily the most expensive one, and prices vary widely.
Finally, help your child explore different ways to pay for college - from working and saving ahead, to applying for grants, scholarships, and federal and private financing. According to Sallie Mae, future students should always file the FAFSA, to make sure they don’t miss out on thousands of dollars in financial aid.
If they are looking for private student loans, suggest they check out College Ave, a fintech company that helps them compare student loans. They may also want to see student loan options offered by Earnest, a well-known lender that has recently added private student loans to their offerings.
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Help without jeopardizing your future
The best way to help your children pay for college depends on your family’s circumstances and needs. Using one or a combination of these options, you can help your children go to college, without jeopardizing your own retirement and financial security.
