Use Your Retirement Savings
The options above are often the wisest choices, but you do have a couple other choices using retirement savings or home equity. While not ideal, this approach might be worth considering in some cases.
If you have some wiggle room with your retirement accounts and arent worried about your future finances, you could tap into your retirement account to help pay for college. This option is only available to parents under the age of 59½ with an IRA account. You will not face early withdrawal penalties but might have to pay taxes on the amount depending on whether you have a traditional or Roth IRA.
This option isnt available with a 401, but you might be able to get a 401 loan. Check with your retirement accounts for your options and what it would cost you to do this.
How to use your retirement to pay for college
Choosing this option when paying for college will depend on what retirement account you have set up and its limitations for early withdrawal. Its helpful to reach out to the institution managing your retirement account to find out exactly how to request a withdrawal to pay for your childs college education.
Your human resources advisor might also be able to guide you on the process if your account was set up by your employer.
Get Started Two Years Before Your Child Will Attend College
The FAFSA currently requires parent tax returns from two years prior to the year when the student will attend school. Lets say that your child is filling out the FAFSA for the 2020 school year. Theyd need your tax return from 2018, not 2019.
Assuming your child will be going to college right after high school, youll need to focus on reducing taxable income in their junior year. Youd also want to avoid unnecessary increases to your income until their junior year of college.
Advantages Of Paying For Your Childs College
Many parents assume that putting their kids through college is the best way to start them out on a successful, prosperous life. And indeed, theres a lot of evidence to show that a college education has big benefits.
Here are a few of the arguments in favor of paying for your kids college education:
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Claiming The Tuition Amount
If your child is a student and qualifies for the tuition amount, its a good idea to make sure they prepare their income tax return first. They should receive the T2202 tax slip from their college or university.
It has been my experience that university students are often unaware that they are required to download the T2202 from their college or university website portal, says Mark Goodfield, a chartered professional accountant in Toronto. Parents need to be diligent and remind their children that they need this slip to complete both the childs and parents returns.
Your child can claim a federal and provincial tax credit for the tuition amount. To claim the tax credit, they must file their income taxes and complete both the federal and provincial Schedule 11 forms. This Non-Refundable Tax Credit tuition can be used to reduce their taxes owing to zero. When preparing their return using TurboTax, Schedule 11 is completed in the student profile and any amounts claimed by them will appear on Line 32300 of their tax return.
How Much Does College Cost
Before you can determine how to pay for college, you have to know how much college costs. The answer? It varies greatly and its a lot more than when I graduated! Per the Annual Survey of Colleges, the average cost for Tuition, Fees, Room & Board for the 2017-2018 school year was $20,800 for public schools and $47,000 for private schools.
As with any average, the cost at individual schools can vary widely. As a few specific examples, for the 2018-2019 school year, the University of Texas will cost you approximately $25,000, the University of Connecticut $28,0000, both public universities. The University of Notre Dame, my alma mater, will cost $72,000 next year, an increase of 140% from when I was in school less than 20 years ago.
Assuming growth continues at current rates, a kindergartener today going to college in 2030, would expect to pay, on average, $35,000 per year at a public college and $75,000 per year at a private college.
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Apply For Private Scholarships
There are thousands of private scholarships out there from companies, nonprofits and community groups. Ask your high school guidance counselor or use a free online service like Scholly that suggests scholarships you might be eligible for. A company called NextGenVest offers a free mentor who can also suggest scholarships, as well as help you understand your aid award.
Ways To Pay For College: Private Student Loans
Private loans stem from a few different sources, such as community organizations, nonprofits, corporations, banks, and even universities themselves. The interest accrued on private loans can be deducted from taxes, which can make them attractive to some families depending on their unique financial situation.
Private loans should be considered a last resort for funding a college degree, as the interest rates tend to be higher and the repayment plans are less flexible. If after youve exhausted every other resource, its paramount to help your child find a loan option that best fits your situation. With College Raptors free Student Loan Finder, you can look at interest rates and terms from leading lenders side by side.
Student loan borrowers will not only pay back the loan but also the interest that accrues every month based on the outstanding balance. For most borrowers, this interest rate is somewhere between 210%. Generally speaking, federal interest rates tend to be lower than private loan rates.
The rate of interest can make a huge difference in how much your child will pay not only each month, but total over the lifetime of the loan.Small changeslike 1 or 2%in an interest rate can add up to thousands or tens of thousands of dollars, depending on how much was borrowed and the repayment terms.
Factors that affect interest rate may include:
- Savings habits
Variable Rate vs. Fixed Rate
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Have The Student Transfer Their Savings To You
Although both student and parent assets count towards a students EFC, student assets are weighted more heavily. As of 2019, up to 20% of student assets count towards their EFC, compared to up to 5.64% of parents non retirement assets.
If your child has $10,000 in their bank account, they could cut their EFC by almost $1,500 by transferring that money to you.
Take Out A Federal Student Loan For Parents
You can borrow money for your kids college with a federal direct PLUS loan. To apply, submit the Free Application for Federal Student Aid, or FAFSA. The form will also make your child eligible for grants, scholarships, work study and federal student loans.
Private lenders also offer parent loans. Going the private route may be best if you have excellent credit. A high credit score may qualify you for a lower interest rate than youd get with a federal parent loan.
However, private loans dont offer all of the benefits that federal loans do. Families should turn to private loans only if theyre in a strong financial position and have a large emergency fund, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors
Tip: Think Twice Before Withdrawing From Retirement Funds Or Taking Out A Heloc
If youve been studiously stashing away funds in a 401, IRA, or other retirement savings account, think twice before tapping into those funds to help your child pay for college.
Withdrawing early leads to taxes and penalties, which can easily eat up a big chunk of what you take out. Plus, youre taking from your retirement fund and you cant take care of others if youre unable to take care of yourself.
There are also risks to using a secured loan tied to your home, like a second mortgage or Home Equity Line of Credit , to pay for your childs education costs. If you miss payments on this type of loan, you could lose your house!
Question : Are Your Finances Solid
Experts warn against putting your own future at risk for the sake of your childrens. Before you put even one dollar into college savings, they say, you should make sure youre meeting your own financial needs. That means having at least three months worth of income in an emergency fund and meeting the required payments on your mortgage and other debts.
You also need to make sure youre saving enough for retirement. Experts say to err on the side of caution with this, since you could be forced to retire early or spend more than you expect in retirement. Only when youre confident all these needs are covered should you start setting aside money for college costs.
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Help Your Student Reduce Costs Or Find Other Funding
Student loans are a popular ways to pay for college, but there are other ways to bring down costs. Here are some ways to cut costs if youre not able to find any student loans for parents with bad credit.
One of the things that parents can do to help their children pay for college or save money is to let them live at home while taking classes. Room and board at school can be very expensive, so if a child is attending a school near home, living at home can save thousands of dollars each year.
The student can still get involved with campus life by joining clubs, attending sporting events, and hanging out around campus, but saving on room and board can save parents from having to get Parent PLUS Loans in the first place.
Parents can also work to help their children find other sources of funding for school. There are thousands of scholarships and grants that students can apply for. Parents should keep an eye out for these opportunities. Many local community organizations offer small scholarships to local students. Even if the award is a few hundred dollars, every bit helps.
Anything that parents can do to help their children make money to reduce college costs can help, even if they arent able to pay for tuition using a Parent PLUS Loan.
Scenario #: Student From A Relatively High
Students from high-income families may not qualify for much need-based financial aid , but that doesn’t mean they can’t get funding from other sources, especially if they have solid grades and test scores.
Based on expected out-of-pocket costs, he thinks ASU will be the less expensive choice. Still, he doesn’t think he can come up with $18,760 per year while he’s a full-time student.
Here are the steps he can take to reduce his costs:
- Live at home. If he attends an in-state public school, and the school’s close enough to his parents’ home, he could save a pretty good chunk of change.
- At ASU, the cost of room and board comes to $10,400. If Student B lives at home rent-free, he could deduct that amount from his out-of-pocket costs.
- He might end up paying for some or all of his meals, and he might incur extra travel expenses to get to and from school. This could decrease the amount he actually saves.
- Maximum Amount Saved: $10,400
- Apply for outside scholarships. Student B receives a $3,000 grant from ASU, but he knows that applying for outside scholarships could help get him more funding. He starts by checking out our guide to scholarships for high school seniors.
- It’s free to apply for most legitimate scholarships programs, so he wouldn’t lose any money by submitting applications.
- Maximum Amount Saved: Indefinite
Here are the steps he can take to cover his remaining cost:
|Estimated Out-of-Pocket Costs|
Gift Aid: Scholarships & Grants
Scholarships and grants are by far the best method of paying for college. These sources of gift aid dont have to be repaid and can reduce the likelihood of student loan debt.
There are plenty of scholarship opportunities available. Encourage your child to spend ample time searching and applying for as many scholarships as possible. Even smaller awards can really add up and make a big difference.
Institutional Scholarships & Grants
Colleges award their students scholarships and grants through offer letters. These financial aid packages can greatly reduce the overall cost and make that school option more affordable. In addition to some automatic scholarships awarded in the financial aid package, most colleges also offer some competitive scholarships. While visiting a college, be sure to speak to the schools financial aid office and clarify any questions you may have.
Outside scholarships can come from employers, companies, national organizations, local businesses, religious centers, ethnicity groups, and plenty more. Every scholarship earned lowers the potential for student loan debt. Its important to note, however, that outside scholarship awards can affect how much money the college will award your student in their financial aid package. Earning scholarship money reduces your familys financial need, after all. Here are some great articles to help out with the scholarship search:
Help Your Student Fill Out The Fafsa
Submitting the Free Application for Federal Student Aid is a critical step when it comes to getting federal student aid. While the student should fill out the FAFSA themselves, keep in mind that dependent students will need information from their parents to finish it. In this case, you as a parent can help make the process faster and easier.
The FAFSA can open the door to college grants, which is money for school that you dont have to pay back. Its also how students qualify for federals student loans, which typically come with lower interest rates than private student loans. Its worth submitting the FAFSA even if you think your student doesnt qualify for federal aid since they might be eligible for aid you dont know about.
Learn More: Student Loan Requirements
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Question : What Are Your Childs Career Plans
Even if youve already saved up money to send your kids to college, that doesnt necessarily mean it makes sense to spend it that way. College is only a good investment if your kids will use that degree to pursue a career where it really makes a difference.
A college degree is a bigger advantage in some fields than in others. Health care jobs, such as pharmacy and nursing, have lots of job openings for new graduates. Engineering and agriculture majors, and some education majors, are also likely to get good jobs, according to Kiplinger.
But other majors, such as literature and the arts, dont offer a clear route to a high-paying job. Your child could spend four years at college only to end up working in retail anyway. If your child is passionate about art, perhaps they could redirect that passion into a more lucrative field like art education. However, if they wont even consider a degree that could pay for itself, maybe college isnt a good investment.
Remember, too, that some careers dont require a degree. If your child is drawn toward hands-on work, such as auto repair, maybe a trade school or an apprenticeship would be a better value. A military career can start right after high school or with a free education at one of the service academies.
Open A 529 Plan In Your Own Name
- 529 accounts offer tax-free earnings and tax-free withdrawals when the money is spent on qualified higher education expenses, including tuition, books, supplies, and some room and board costs.
- You can deposit up to $75,000 into a 529 plan without incurring gift taxes when you elect to treat the contribution as if it were made over a five-year period.
- Your grandchild can use the funds from a 529 plan to pay for any eligible post-secondary institution.
- Depending on where you live and which plan you open, you may get a state tax credit or deduction for your contributions.
- Although the money in the account will have no effect on your grandchilds financial aid eligibility, the amount you withdraw to pay for his or her college will be counted as student income on the FAFSA.
- The earnings portion of non-qualified withdrawals are subject to income tax as well as a 10% penalty .
- In some states, money saved in your 529 account will be considered available assets that must be spent on medical and long-term care expenses before Medicaid can begin.
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Free And Affordable Colleges
Students can also keep their college costs down by choosing a school thats more affordable. One common choice is to go to a community college for the first two years. At these schools, Demos found, the average net price is typically lower, ranging from $4,188 to $15,149 per year.
Students can lower their costs even more by living at home while attending a community college. That way, they only need to pay for tuition and fees, which cost an average of $3,440 per year, according to the College Board. Thats well within the amount students can earn through part-time and summer work.
Some colleges arent only affordable theyre actually free. All across the country, there are colleges that offer free tuition and sometimes room and board as well to students who meet their strict criteria.
The best-known free colleges are the military service academies, such as West Point and the U.S. Naval Academy. At these government-funded schools, all students attend free of charge. In exchange, they pledge to serve five years in the military after they graduate.
Other free colleges, such as Berea College in Kentucky and the College of the Ozarks in Missouri, require students to work on campus in exchange for tuition. Still others offer free tuition to students who want to train for a specific field, such as music, the ministry, or naval engineering. And in several states, community colleges offer two years of education for free to any student whose grades are good enough.