Sending your child off to college is scary enough, but add in tens of thousands of dollars in debt and a 30-year repayment term, and it’s downright terrifying. My hope is that these tips serve as a guide to help both you and your child understand college financing and make the best decisions for your family. Remember, it’s never too early or too late to financially prepare for college!
Finances are very personal, so first and foremost, have a conversation with your partner. Do you guys want to cover your child’s entire cost of school? Do you want to contribute what you can, or do you want your child to pay for college themselves? There is no magic answer, but the key is to be on the same page with any other financial decision maker in your house. Whatever you decide, openly talk with your child so everyone is on the same page.
If you decide you want to contribute, or pay for your child’s education, starting early is key. The two most popular types of college savings accounts are ESA and 529. Both are tax-free, when used for college, and will make more money over time than a traditional savings account would. They both have benefits and drawbacks; for example, an ESA has an annual cap of $2,000 and there is no state tax deduction, but you can use the money for k-12 schooling if need be, and the investment can be 100% self-directed. A 529, on the other hand, has a much higher cap and some states offer a tax deduction, but it can only be used for college expenses. Both have a penalty if the money is withdrawn and used for something other than educational purposes. Here is a great resource to learn more about both investment types, make sure you do your own research and pick the one that fits your needs best.
As your child grows, be open with them about the cost of college and encourage them to set aside some of their own money for tuition. Talk with them about debt and make sure they understand that loans must be paid back; they’re not just free money. If they can keep their grades up and get involved in extracurricular activities, they will increase their chances of getting scholarships. It’s also important to talk to them about options. Instead of a four-year university, maybe they live at home and attend a community college for two years.
When they’re ready to begin applying to college, help them apply for scholarships as well. The internet is a great way to find scholarships and a simple Google search can bring up hundreds of options! Make sure your child is talking to their guidance counselor as well, since they often have access to a number of scholarships they can specifically recommend.
If a savings account and scholarships aren’t enough to financially prepare for college costs, it’s time to talk about financial aid. Filling out the FAFSA is the first step. It’s important to know that financial aid is based on your parental income. After applying, your child may qualify either for grants (which do not need to be paid back) and/or a loan (which would need to be paid back). They can qualify for either subsidized loans, unsubsidized loans, or a combination of the two.
With subsidized loans the government pays the interest until your child is no longer in school. Unsubsidized loans begin accruing interest when the loan is taken out. Another common loan is a ParentPlus loan; this is also a government funded loan, but instead of being the student’s responsibility, it is the parent’s responsibility to pay back. Lastly, your child can take out a private loan, which is exactly what it sounds like. Private loans are funded by banks and are taken out by the student, typically based off of their credit history. These loans are not based on need, and you will normally see a higher interest rate and less flexible repayment terms. Sometimes you, as the parent, can cosign for your student to help them quality or get them a better rate, but remember your putting your credit score in the hands of your eighteen-year-old. Deciding to borrow money is a personal choice, but please make sure your child understands the commitment of a loan and the potential impact it will have on them down the road.
I know that was a lot of information, but believe me, it’s better for you and your child to be financially prepared for college and to understand the process before going through it.