Paying for College

Due to the skyrocketing costs of college tuition, most parents can not afford to fully fund their children’s higher education expenses from investment assets. Even if you have been diligent about setting money aside via a 529 Plan Account, Custodial Account, Traditional TAP Account, etc. it’s still not easy to meet these expenses.

For the 2004-2005 school year, the national average cost of a public college was $14,640 and a whopping $30,295 for a private school. Although costs have been recently increasing at a much higher rate, a 6% inflation rate would be a total cost (four years) of funding for a public school $102,077 for a 10-year old and $76,278 for a 15-year old. The younger the child, the greater the expenses. The total cost for a 10-year old to attend a private school would be $211,231 and $157,844 for a 15-year old again based on the national averages. Even most higher income earners do not have the assets available to fully cover these needs.

If that’s not depressing enough, statistically only a small percentage of those who apply for scholarships actually receive one so that puts most, if not all, of the pressure on the student and his/her parents. And because most government student loans are need-based and very limited in amount, parents are left to foot the bill some other way.

So how do you do it? If cash flow doesn’t afford you the luxury of meeting these expenses, you will need to explore other options. Personal loans can work well if you have adequate equity in your home. Not only are these rates generally lower because they are backed by an asset, but the interest is also fully tax deductible if you itemize your deductions.

Another excellent option is the use of a PLUS Loan. Parents, step-parents, custodial or non-custodial parents (and co-signers) with secure credit can all obtain a PLUS Loan for a dependent child’s education. This loan is used to supplement student financial aid (Pell Grants, Stafford, Federal Work Study, etc.) already granted in your child’s Award Letter or to cover the full costs of education.

This federally guaranteed loan offers flexible options such a deferment and forbearance, low variable rates (capped at 9%), no-penalty early payoff and in some cases, tax deductible interest. The PLUS Loan is the most accessible and flexible form of parental aid you can obtain.

As of June, 2005 the variable rate is 4.17% and reset annually each July 1st by the federal government and will never exceed 9%. Many lenders will even offer reduced rates for a period and will also offer lower rates for automatic payments made from a bank account. Another advantage is you qualify on your credit alone – not income levels, collateral or need basis. It also keeps you from having to refinance your home or liquidating investment assets as well. Additional benefits include making payments over a flexible 10-year term, the ability to pay the loan off without prepayment penalty, the ability to consolidate after the final year disbursement, and possibly get a tax deduction.

The only disadvantage to this type of loan relative to a student loan is most require at least some form of repayment within 6 to 12 months of disbursement although usually interest only.

So if you are like most parents and fretting about saving enough for college costs, make sure your credit report is clean with a good credit score, and you can relax knowing there are options on which you can rely.