11th-hour college financing
Tuition may seem out of reach if you didn't plan ahead, but loans can help
NEW YORK (CNNfn) - You meant to save for Mikey's college education, really, you did.
But then came repairs on the house, a new car, credit card bills that needed to be settled, and somehow your child's higher education ended up on the financial back burner.
While most planners agree it is never too soon to start saving for college, there are options for procrastinators.
"For those who have missed some deadlines, it's not too late," said Steve Stocks, director of financial aid services at Sallie Mae. "There are ways to do it."
Tapping into federal loans
Loans are usually the best financing choice for late-starters, provided interest rates are low.
Federal student loans are among the most cost-effective. With lower interest rates than their consumer counterparts, federal loans usually exempt students from paying interest while they are in school and during other grace periods. In addition, as much as $1,500 in interest paid on these loans can be tax deductible. Some federal loans even offer repayment plans that can save borrowers money over the long run.
One of the best types of federal aid is the Stafford loan, available to undergraduate and graduate students attending accredited colleges at least half-time. Stafford loans carry an 8.5 percent interest rate and can be both subsidized or unsubsidized. Eligibility for subsidized loans, whose interest the government pays while the student is in school, is determined on a need basis.
Unsubsidized Stafford loans are available to those who do not qualify for the subsidized version. They are not based on family income, but students are responsible for the interest that accrues during school or other determined grace periods. Students may defer making payments on unsubsidized loans until after graduation, in which case the accrued interest is capitalized or added to the loan principal.
Stafford loans have different borrowing maximums, depending on the student's year in school.
For students who do not qualify for Stafford loans or need additional funds, Parent Loans for Undergraduate Students (PLUS) come highly recommended. PLUS, which are not based on income or assets, are low-interest loans that cover the actual cost of college, less financial aid. To be eligible, borrowers need only pass a credit check. The loan is under the name of the parents, who have up to ten years to pay for the loan. Loan payments are generally required within 60 days of receiving the loan.
To find out more or to apply for a federal student loan, download an application from the Department of Education's Web site.
Borrowing on current assets
Aside from federal loans, you can also borrow against current assets, such as your home or retirement savings, though this is not necessarily advisable, according to some experts.
While tax savings may make an additional mortgage on your home cheaper than student loan debt, borrowing against property is risky, as you could lose your home.
"If there is any chance you can't pay it off, don't do it," said Kristin Davis, author of Kiplinger's "Financing College."
Borrowing against retirement funds should also be a last resort, since other loans, at better rates (Stafford, PLUS, etc.), are available. Not only does a loan against your 401k savings become due immediately when you change jobs, but if you do not have the funds to pay it off, the loan becomes a distribution that will require tax penalties.
Rather than taking out a loan against retirement funds, you may want to suspend 401k contributions in the short term and use the funds toward college instead. That is only advisable for younger parents, whose retirement may still be years away with time to recoup the lost contributions.
"It's an individual thing. But many people don't want to cash out their stocks, especially in this market. They want to let that money grow for them," said Sallie Mae's Stocks.
Weighing pros and cons
Regardless of the type of loan taken out, it is important to consider your financial situation and your ability to pay it off.
You don't want to find yourself in a situation down the line where you are simply unable to pay off a loan. Parents should also consider what type and how many sacrifices they are willing to make to send their child to college. Are you, for example, willing to forego a new car for seven years or skip a few vacations to the Caribbean?
Parents should calculate in advance what the monthly repayment on loans will be. Davis recommends monthly repayments not exceed $200 over ten years, the maximum level she believes an entry level employee will be able to afford.
While need often determines the grants a child is eligible for, merit-based scholarships are available -- and not just for budding geniuses.
One very helpful Internet-based service known as FastWeb allows students to set up personalized profiles that match specific skills, abilities and interests to the company's wide-ranging scholarship database. The free Web service will email the student or store results in an online mailbox as fitting scholarships become available.
Because FastWeb has many fraudulent copy cats, be wary of any Internet sites, or anyone for that matter, that promises free money for college or requires a large fee to provide thousands of dollars in scholarships. If it seems to good to be true, it probably is. Check with the local Better Business Bureau.
In addition to loans and scholarships, billing services, such as Academic Management Services, can help minimize the financial impact of college by spreading tuition payments throughout the year. Billing services typically allow parents to divide annual tuition into ten payments. They generally do not charge interest, though they do require a one-time fee, usually about $30 per semester.
Many billing services also include tuition protection insurance, which covers payments in the event the bill payer dies. Some plans also protect against involuntary unemployment.
Under no circumstances should you charge your child's way through college on your credit card. With interest rates on credit cards often in the double-digits, almost any alternative is more cost-effective.
While the basic costs of higher education, such as tuition and room and board, are generally inflexible, there are ways to cut back on some expenses if your savings are limited.
For one, find ways to minimize transportation costs to and from college, as your child is likely to make about four trips home during the academic year. Consider car pools and book flights far in advance.
- Do not give your child a car unless absolutely necessary, as the cost of insuring an additional "primary" driver can run very high.
- Buy used books instead of new ones and resell books at the end of the semester. Look into online book stores, whose prices are often below those of campus stores.
- Set up a realistic monthly budget for your child and stick to it, to prevent excessive personal spending.
Finally, the type of college your child chooses will greatly impact the bottom line. The annual cost of attending a private university can run as high as $31,000, while a public college costs about $14,000.
While much more than money should be taken into account as your child chooses a college, if finances are a legitimate concern, you may seriously want to mull the choice of a public university over a private one, although financial advisor Stocks admits "that's a tough call."
"This is a major decision in life," Stocks said. "You're investing in your son or daughter. This is going to be their future and you want them to get the best education possible."
But Stocks admits that the "best" college isn't always the most prestigious or costly one. A good match, Stocks emphasizes, is one that meets the student's needs academically, socially and financially.
Your child may also want to consider dividing his or her undergraduate education into two universities, spending two years at a less expensive public or community college and two years at a private or Ivy League university. That plan comes with obvious risks, as your child may not want to transfer when the time comes or deal with the upheaval of making such a change.
-- by staff writer Nicole Jacoby