Financing College Expenses

The current cost of a UMass Amherst education is more than $30,000 annually.  Boston College tuition is more than $80,000 annually!  This article covers various college funding options.

Grants & Scholarships.  These are great because they are “free money.”  Colleges may provide these as part of their financial aid package.  This varies from college to college, and can be based on financial need and/or athletic or academic abilities.  There may be programs available in your local community, with your employer, or with your child’s High School.

Savings.  The second bucket includes various savings/investment programs.  529 plans are investment accounts specifically for education.  Money pulled from 529 plans is generally tax-free if used for education expenses.  If you have a Roth IRA, you are generally allowed to pull out your contributions tax- and penalty-free.  Earnings in your Roth IRA and most retirement plans (IRA, 401k, 403b, etc.) can be used for college expenses, but it is generally taxed.  There is normally a 10% penalty if money is withdrawn from retirement accounts before the age of 59 ½, but college funding is an exception.  Using retirement accounts for college expenses will hurt your own long-term retirement planning.  Because of this, I generally do NOT recommend utilizing your retirement funds for college expenses. 

Borrow.  The third bucket to consider are loans.  For undergraduate students, a small amount of loans is available through Stafford loans, $5,500 for the first year, $6,500 for the second year and $7,500 for the third year and beyond, to a maximum of $31,000.  Up to $23,000 of Stafford Loans may be subsidized if your income is low enough, which means the cost of borrowing is subsidized by the government.  Once Stafford Loans are utilized, government-sponsored Parent PLUS loans are generally utilized.  These are in the name of the parent(s), and you need to qualify for them (e.g. have good credit).  If the parents do not qualify for Parent Plus loans, undergraduates can borrow as much as $57,000 in Stafford Loans instead of $31,000.  Borrowers in graduate programs can generally borrow as much as $138,500 through government programs.  There are several companies that offer private student loans.  In almost all cases, it is generally best to utilize government-sponsored loan programs instead of private loans.  If you utilize private loans, there are several institutions that provide these, so it is good to shop around.  One advantage of private loans is that they can be taken out in the child’s name, although the company will generally require the parent(s) co-sign the loans.  Some parents also utilize the equity in their house to finance college by taking out a Home Equity Line of Credit (HELOC).  A HELOC provides a credit line to borrow against equity in your home, at a relatively low interest rate, with flexibility in repayment terms.

Work Study.  Most colleges offer Work Study Programs.  These programs allow your child to work for the school in return for a reduction in tuition.  Your child may have to qualify for this type of program.

Payment Plan.  Most colleges also offer payment plans at no charge.  You can finance a portion of the tuition each year, typically over 10 monthly payments.

Create a Plan.  It is never too early to plan.  You can set up a savings vehicle for as little as $50 per month.  Once your child is in high school, it is good to make a more concrete financing plan.  I encourage you to involve your children.  You may want to set a limit on how much you will finance, with an understanding that your son or daughter is responsible for the balance.   

Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation.