How Parents Can Budget for Their Kid’s College Education

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Kids can be quite expensive. It seems you were just looking forward to a time when you no longer had to pay for their diapers and now they need money for going out, the latest clothing and of course, college!

Parents who will be paying for their kids’ college are looking at a major expense but planning early can help a lot. Here are some things you can do to budget for your child’s college expenses. 

Create a College Savings Plan

Parents who start stashing away money for college when their children are young will have a financial advantage, especially if they invest in a fund that is specifically targeted towards paying tuition. The 529 plan is one that is recommended. 

529 plans have high contribution levels so you can put away a good amount of money towards your child’s education. Their long-term investment options provide the potential for them to grow quickly. 

When you’re ready to pay for college, you can take out the money with no penalty and the money will not be taxed. 

Apply for PLUS and Private Loans

Parents can apply for a Parent PLUS loan by using the Free Application for Federal Student Aid (FAFSA). The loan allows holders to borrow an amount that equals a portion of the tuition or the full tuition.

The loan is treated like any other student loan but there are some exceptions as follows:

  • Your student loan bill will be due as soon as your loans are fully distributed. 
  • You may not quality for a forgiveness program which is offered with traditional student loans. However, there are ways to make loan payments more manageable.
  • PLUS loans are currently at a fixed rate of 7.08% making them the highest rate charged for federal loans. It is for this reason that banks and private lenders may be a better option. 

Use Private Student Loans

Private student loans will have lower rates than PLUS loans for those with good credit and income that allows them to qualify. There may be other features available. Research carefully to find out what would be included with your loan. 

Cosign Student Loans

Students may need to supplement their federal loans with a private student loan. These require an extensive history and a good credit score so parents may be required to cosign.

If you cosign on a loan, you essentially become liable for the amount owed so determine how responsible your child is with money before taking on this risk. 

Use Your Retirement Plan

Withdrawing from a retirement plan is another way to fund college. Adults under the age of 59 and a half will avoid withdrawal fees from an IRA if the money is being used to pay for tuition. (I don’t recommend this as a plan, but, it’s an option so I wanted to include it.)

However, you may still owe taxes to the IRS on the distribution amount. 

If you don’t have an IRA, a 401(k) is another option. These loans typically have five-year terms and the interest paid goes back into the account. Account holders can borrow half of the amount invested or $5000, whichever is smaller. 

However, it is important to remember, in the case of retirement loans, short term solutions could have long term consequences. If you withdraw money, you’re missing out on time the money could be in the account making interest and you will have to save up more later to make up for it. 

You should also note that while you can get a loan for college, you can’t get a loan for retirement. Therefore, you may be better off getting a loan for college than borrowing it from your retirement fund. It is advisable to crunch numbers a bit before making this decision.

Use Home Equity Loans

Using a home equity loan to avoid student debt has its share of advantages and disadvantages. On the downside, you could end up owing more money on your mortgage than your home is worth and if you have trouble paying back your home equity loan, you could lose your house. 

Another issue is that the home equity loan may be considered when the government is determining the amount of financial aid your child is eligible for making it harder for them to qualify. 

Finally, the recently passed Tax Cuts and Job Act has prohibited people from deducting interest on a home equity loan to pay for college. 

However, on the upside, some home equity loans can provide lower interest rates than student loans. Home equity loans may also allow you to borrow more money than a student loan would. 

Consider Asking Relatives to Contribute

Remind relatives that contributing to your child’s college fund may be a great alternative to other holiday and birthday gifts they would consider giving. 

College is a major expense for parents but there are things you can do to ease the burden. Start looking into your options early on to avoid being caught unprepared. Good luck getting your child on their way to a promising career.

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