If you're the parent of a high school senior, you may think the worst is behind you. Your child has chosen a school, applied, and been accepted. Financial aid packages are disbursed.
Now you just drink lemonade and wait for fall, right?
I wish that were true. Unfortunately, there's another gauntlet ahead of you – student loans.
Federal Loans Often Aren't Enough
A student can take out a maximum of $5,500 in federal student loans their freshman year. Altogether, the max for federal loans totals $27,000 over four years, and $31,000 total over an entire career.
I don't think I have to tell you that many schools cost $27,000 for a single year, once you factor in room and board, books, transportation, and fees.
Hopefully the school you selected isn't too expensive and provided a generous aid package. However, even in the best case, you're probably facing a funding gap.
Where do you turn when federal loans aren't enough?
Parent Plus Loans
Many schools tout federal Parent Plus loans as the answer to a parent's concerns. However, these funds are not always the best source of money to pay for school.
Benefits of Parent Plus Loans
There are several benefits of using a Parent Plus loan. If your credit isn't excellent, you likely won't get a good rate from a private lender. Also, Parent Plus loans have a fixed interest rate and flexible payback terms if you fall into trouble.
If you're concerned about your ability to pay back your parent loans, a Parent Plus may be a good choice.
Disadvantages of Parent Plus
The biggest disadvantage of Parent Plus loans is that if you do have good credit, they are very expensive in terms of interest.
The actual fixed interest rate isn't that high, but with a 4% origination fee removed from the principal every time it's disbursed, the effective interest rate is much higher.
Before you choose a Parent Plus loan, make sure you compare it with private loans options. Pay attention to the full cost of each loan, including fees, duration, and interest payments.
Private Student Loans
Private student loans are available from national banks and local banks and credit unions. If a bank in your town doesn't offer a private student loan, don't worry – you can apply with a variety of reputable loan providers online.
These providers include Sallie Mae, Discover, Citizen's Bank, College Ave, Commonbond, and more. Don't be shy – shop around!
Many of these lenders will only approve you for money one year at a time. Don't worry – you don't have to pay four payments a month for years to come. Instead, consolidate student loans after your student graduates.
The biggest advantage to private student loans is that you can compare providers and find the best rates. The biggest disadvantages include needing excellent credit and facing less flexibility with repayment if you have financial trouble.
Other Options: Home Equity and Investment Savings
If you have home equity and/or investment savings, you may consider using those to pay for college. You want to do this very carefully so that you don't put yourself into a bad position financially.
Many parents find that a home equity line of credit (HELOC) is a better option than a home equity loan. You have access to credit for multiple years, which can be helpful if you're looking at the big picture of paying for school until graduation.
A HELOC also allows you to use only the amount of money you need. You can pay it off as you go, using the same credit line again and again.
It can be tempting to dip into your retirement or investment savings to help you children pay for school. This should be a last-choice option unless the investment account was intended for school, like a 529 plan.
If you do choose a 529 plan, by the way, make sure it's well-managed and not loaded with fees.
You never want to put yourself in a position where you're compromising your future so that your child can attend school. A university education is not the golden ticket it once was, and there are always less expensive options. Your retirement should never be sacrificed for college tuition.
How Will You Pay for College?
There are a lot of options, but all of them have significant advantages and disadvantages. The real key is to choose a school that's affordable – even if it means starting at a local two-year college, or living at home during university.Only you can make the choice that's right for your family. Just be sure that everyone – including you – still has a financial future after graduation.