About 1,436 days after high school starts, you will get your first bill and the cash is due. And if you were really bad at timing like our family was, you may have two, three or four overlapping years of college bills due at the same time, with more than one kid. What’s a parent to do in that situation? The answer is to model it out with the tools you have on hand.
The tools are: Savings, Cash Flow, Kid Debt, Parent Debt
There are 4 different levers to pull when you are seeking to pay for school. And they are not all equal in size or scope.
Let’s take them one at a time:
Savings- Savings is basically your pile of money. If you have been dutifully investing, in your 529, or elsewhere, good for great job. Maybe you have nice grandparents who started an account for your kids. The lovely thing about these accounts is that they don’t really count for financial aid. The value of a 529 plan owned by a dependent student or a parent (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. Any parental assets, such as a brokerage account, savings account, and other assets, will reduce a student's aid package by up to a maximum of 5.64% of the asset's value. Especially if in grandparents’ names, they are totally off the books. The not so wonderful thing about them is that they can’t be used for transportation or furnishing a dorm, for example, which can add up over time. On the flipside of that is you can retain $10,000 to pay for a loan or roll up to $35,000 of it into a Roth IRA if you don’t use it all up. You may also use it toward graduate school or private school for younger children.
Savings have the benefit of allowing you to sleep at night and the clarity to know exactly what you have, even when the explicit costs are not clear. But the catch is that any large pile of cash that is dearly accumulated is precious
Cash Flow- I hear this story over and over again: for years, you earned a decent income to have it all eaten up by daycare, summer camp, new tires, or maybe one or both of you endured a layoff. And then all of a sudden your income takes off and you actually feel like you can breathe, maybe make up for the shortfall in what you’d hoped to be investing for college, but your savings are lacking. One of the choices available to you is to account for a certain amount of cash flow every month you can devote to covering tuition. And colleges often will offer payment plans starting the summer before freshman year to start knocking that bill down.
Kid Debt-This is a relatively small lever, but can be significant depending on the path your family chooses, and the amount of aid you get. Also, some families like kids to have some “skin in the game” even if they can cover the bill. Each kid -regardless of wealth or household income- can access a total of about $30,000 for their college expenses in Federal loans. Over a 10-year level payment, that amounts to about $325 a month.
Federal loans offer several attractive features for students seeking to finance their college education:
- Lower Interest Rates: Generally, federal loans have lower interest rates compared to private loans. This means you'll pay less in interest over the life of the loan.
- Flexible Repayment Plans: Federal loans offer various repayment options, including income-driven repayment plans that adjust your monthly payments based on your income and family size. This can make it easier to manage your debt after graduation.
- Interest Subsidies (Subsidized Loans): For eligible students, the federal government may pay the interest on subsidized loans while you're in school or during certain grace periods. This means you won't accrue interest on the loan balance during these times.
- Deferment and Forbearance Options: If you're facing financial hardship or are unable to make payments, federal loans often allow for deferment or forbearance, which temporarily pauses or reduces your payments.
- Loan Forgiveness Programs: Certain professions, such as public service or teaching, may qualify for loan forgiveness programs. These programs can help you eliminate your federal student loan debt after meeting specific requirements.
- No Credit Check (Typically): Unlike private loans, federal loans often do not require a credit check. This can be beneficial for students with limited or no credit history
Parent Debt- There are two flavors of loans parents can make use of:
- Publicly funded loans from the Federal government and certain state governments, and
- Private loans.
One of the most important distinctions is who benefits from funding those loans.
Private student loans are funded by investors seeking returns, such as banks, credit unions, and online lenders. These institutions provide loans directly to students or their parents to help cover the cost of college education.
It's important to note that private student loans often have higher interest rates and may require a credit check compared to federal loans
Public loans are funded by the federal government via the Department of Education. Because there are no investors on the other side of these loans, only bureaucrats, the mandate is different. These loans
The most important thing to note here is that students can’t borrow to fund their college education. All paths include consideration for parent finances, including filling out the FAFSA or the Free Application for Federal Student Aid, which allows each student to access the ~$30,000 in student loans. Private loans are not provided to 18 year olds who generally don’t have a credit or job history, except in some cases with a cosigner. Here’s where Parent Plus Federal Loans come in.
Parent Plus Loans allow families to borrow the entire Cost of Attendance (aka COA) for each year of university. This figure is published on the website at every school. The best thing about these loans is that they offer multiple repayment options in terms of years and other benefits that private loans which exist for the enrichment of investors cannot provide. They are far easier to acquire than private loans as they don’t ask for any financial documentation, or even employment, and only look for adverse history like bankruptcies to limit access to these funds.
Optimizing each one of these levers, using them or choosing not to, is going to be a process. But it will it will make your goal’s and your student’s goals achievable.