For parents, college is a simultaneously exciting and daunting enterprise. On one side of the creek, you’ve instilled within your child a sense of adventure and a love of education—good job! On the other, you may have just signed you, your graduate, and the family up for decades of loan payments and debt mitigation. That sounds terrifying to most people, but don’t fret. Parents before you have figured out how to finance this massive undertaking, and parents after you will have an even more difficult time coming up with tuition payments. Though it’s easy to get lost in the stream when it comes to financing college, there are strategies you can adopt to tackle the situation one wave at a time.
If your college student is several years away from entering school, you’re in the best place to tackle the financial mountain head-on. The best way to pay for your child’s education is to pay for it directly—as much as possible. One of my favorite strategies is to save through a 529 Plan, which you can start as soon as your child is born. This is a tax-advantaged saving plan designed specifically for college costs. Sponsored by states, state agencies, and education institutions, the money you invest will grow, tax-free, and can be withdrawn for educational purposes without paying taxes.
If you’ve saved your financing strategizing for the last minute, you can still take steps to ensure your child’s financial wellbeing. Every college student (or their parent) must complete the Free Application for Federal Student Aid (FAFSA); the Department of Education utilizes the reported data to assess the amount of federal loan support your student needs. The Stafford Loan is the most common type of federal student loan, and it can be subsidized or unsubsidized. These have low, fixed interest rates, repayment starts six months after graduation, and credit history is not a factor. In most cases, your child will be eligible for a Stafford Loan to cover some or all tuition costs. However, the Stafford Loan will be in your child’s name; technically, this will be their financial burden.
However, the federal government also has something called a Parent PLUS Loan, which allows parents to help finance their child’s education. PLUS Loan holders can borrow an amount equal to the cost of tuition, but securing this type of loan is more difficult than the Stafford. Additionally, Parent PLUS Loans come with a fixed interest rate of 7.00% (very high), and repayment begins as soon as the loan is fully distributed. If you are not awarded a PLUS Loan through your FAFSA application, reach out to the college’s financial aid office and ask how you can request a PLUS Loan.
If you are uncomfortable taking out loans for your student’s education, you have other options. Many parents tap into their retirement plans. If you choose this option, check to see if you will incur early withdrawal penalties or what the taxes on the withdrawal might be. However, think very seriously about this decision; there are loans available for college, but there are no loans for retirement.
Ultimately, your child should take the wheel as much as possible when planning for college. While I understand that you want to help as much as possible, this is a difficult game to navigate: you want to secure your own financial wellbeing while ensuring your child’s ability to repay student debt. I recommend sitting down with your college student to talk about what debt is, what it means, and how they can begin to finance their educational investment (we have a guide, if it helps). If all else fails, talk to the school’s financial aid office—they frequently steer parents in the right direction.