For most families, covering the cost after financial aid is a multi-pronged approach.
It’s a process of looking at all financial resources and determining which are the most efficient for the family.
Here is a step-by-step process to develop your college financial plan:
What is the total family cost for first year: $
If you have a 529 College Savings Plan, plan on using 1⁄4 of the 529 each year. Value of 529: $ ÷ 4 = $
Reduces total family cost: $ - 1⁄4 529: = $ (Cost after 529)
Next determine how much you can do through your current monthly budget: Cost after 529 $ - Monthly Contribution x 12 = $
After subtracting that amount, consider a combination of available cash and Investment; then consider loans. This is somewhat a subjective decision.
Here are the loan options:
Home Equity Line. Compare the current interest rates to other loans. You can get usually get 80% of the equity.
This would be a collateralized loan, backed by the equity in your home, which is preferred to not.
In most cases you can borrow against your retirement account (the value of your retirement account. You’ll have to check with your benefits administrator to see what the provisions are. Normally you have a certain period to replace the borrowed funds before they are treated as income. If you rare not yet 59 1⁄2 yet, it would also carry a 10% penalty for early withdrawal if you let it go to income. It is not advisable against putting your retirement at risk.
The government’s parent PLUS Loan allows you to borrow up to the total cost of education. The payoff period is 10 years. The interest rate is normally lower than other personal loans. You can find any number of loan payment calculators to determine the monthly cost. This amount must be added to any amount you will be including on a
monthly basis (see above) to determine the effect on the family’s budget. With the PLUS loan you have the option of just paying interest during the school years.
Sallie Mae has a private Smart Loan that the student takes out co-signed by the parent. It can be a variable or fixed and the interest rates are lower, but dependent on credit ratings and the amount borrowed, etc. You won’t know exactly until you apply. Submitting an application does not commit you to taking the loan. The downside is, this is a private loan and is not as flexible or forgiving as a government loan.
In summary, it is advisable to look at every other option prior to taking on debt. The exception would be if borrowing was a part of a strategic plan of investing an equivalent or greater amount during the college years, allowing for pay off options upon graduation. Market conditions must be considered.
This paper is provided as information only and not a basis for making financial decisions. Always consult your financial advisor.