The New “Paying For College” Paradigm
When my daughter was accepted to her top college choice and we received the financial aid package, we knew the college was an almost feasible option, but we would need to be creative to manage the fees. Because we don’t have a big chunk saved in a 529 account, we turned to the possibility of refinancing our house to lower our mortgage and free up some monthly money. We were just three years from paying it off in full, but at a 4.125 percent interest rate, refinancing made more sense than a ParentPLUS loan with a 6.84 percent interest rate (the 2016–17 rate). When we refinanced, we freed up $600 a month to redirect toward college fees.
College costs have risen so quickly in recent years that most middle class families can no longer rely on the old adage of saving from a child’s birth to cover a college education at a child’s first choice college. These days, a new paradigm has emerged that features a sophisticated mix of solutions to handle college costs because today’s assumption is you probably haven’t saved enough and aren’t able to.
Here are a few things to think about for financing college…..
Net price calculators. I’m a bit of a nut about these calculators, but to me it makes all kinds of sense to understand what a college might charge before your child applies (don’t assume the sticker price is what you’ll pay) and to choose a college that’s affordable for your family. No one needs to go into the college application season blind anymore. Find these calculators on every college website and use them to determine an approximation of a financial aid package. The more the calculator asks, the more effective it is. They are especially useful if your child is interested in a private liberal arts college that charges upwards of $60,000 per year. Use them to find out which colleges offer what types of aid (merit, need aid) and whether your family qualifies based on your income.
Think strategically about what colleges have money to offer. The college search process shouldn’t be taken lightly. Although it’s fun to go on college visits and hopefully you’ll create memories spending time with your student, the most valuable time spent will be researching and understanding college data. To find colleges that will give your student the most money in either financial aid or merit scholarships, it’s important to understand what the college’s financial aid giving history is. This information can be gathered from data the government collects from colleges and stores in the IPEDS database and a school’s common data set. “You can’t get financial aid from a college you don’t apply to” is a phrase from a new website called College Money Search. If you’re not a numbers person or if all this seems overwhelming (which is how it makes me feel), it’s worth considering letting the data experts at College Money Search put a list of colleges together that are most likely to give your student the most money. They use your student’s test scores, GPA, potential major, location/size preferences along with your family’s financial situation to match your student to schools that are likely to offer the most money. By using their list as a basis for your student’s college search, at least you’ll know you would have done all you can to find the most affordable colleges for your family.
College partnership programs. Some cohorts of states offer tuition reciprocity to students in neighboring states. In the East, the New England Regional Student Program allows residents to enroll at out-of-state New England public colleges and universities at discounted rates if an approved major isn’t available in their home state. In the West, the Western Undergraduate Exchange Program offers tuition at one and a half times the in-state rate to qualifying students (it’s technically a scholarship so you need to earn it, but many students do). Some states are cheaper than others (Montana, for example), and state flagship universities such as the University of Washington typically don’t offer WUE scholarships.
Scholarships and grants. By far, students will do best seeking need-based financial aid or merit scholarships from the colleges they apply to. Start there with that net price calculator. But don’t give up on outside scholarships. Typically they come in increments of $500 to $1,000 but that can help with books and other small fees. My daughter was fortunate to win a $5,000 renewable scholarship, the only one awarded from her 20+ scholarship applications. Looking locally or regionally will serve your student best.
Federal student loans. The federal government limits what students are allowed to borrow these days to help them avoid burdensome debt. The maximum amount is approximately $31,000 for four years ($5,500 the first year, $6,500, and $7,500 the final two). If you read about a student with $75,000 of debt, they either took out private loans — best to be avoided — or they’re a graduate student who’s eligible for larger loans. If an undergrad student needs to borrow, federal student loans are usually the best option. Skip the private loans.
Refinance your house or set up a HELOC. Not all families are in a position to refinance like ours did, but if you’ve got solid equity in your house built up, today’s interest rates make it a sensible solution. The other option is opening a home equity line of credit that may serve you better than a taking a high-interest private loan or a federal ParentPLUS loan. Plus you may qualify for a tax deduction. Use only the amount you need, or don’t use it if you’re flush enough to pay the college bills as they come in. But it’s nice to know you can access it in a pinch. Whatever you choose, do your research on interest rates and bank fees.
Peer-to-peer lending. In recent years, this nontraditional form of lending has gained traction. These types of unsecured loans between individuals, also known as social lending or microloans, typically offer lower interest rates than private loans (depending on your credit score) and eliminate the hassle factor of conventional banks. P2P lending sounds like a great idea, and you’ll hear about it, but at this time there aren’t many options for college families.
- Common Bond refinances students’ loans and parents’ ParentPLUS loans at lower percentage rates, starting as low as 2.23 percent. Students must have attended one of Common Bond’s network of 2,000 eligible schools and graduate programs to qualify. Students in MBA programs can also apply for a loan. Common Bond doesn’t charge origination fees and loans can be transferred from the parent to the student.
- SoFi allows students to refinance existing loans with lower interest rates, and parents can apply for a parent loan or refinance a ParentPLUS loan. Loans cannot be transferred to students.
- GreenNote is not a loan program; instead it offers a platform that allows family and friends to make micro-donations to a student.
- Another option for undergrad students is to borrow from a family member, perhaps a grandparent, and write up an agreement that includes the loan initiation date, number of payments and monthly amount, as well as an agreed-upon interest rate. Decide together when the loan payments should begin. Keep in mind, borrowing from family can create extra stress. It works best when you treat it as a business deal, and the borrower is responsible about paying it off. Ensure the family member has enough money to feel comfortable about the loan.
Recouped spending. As you’re considering how you’ll pay tuition fees, don’t forget to take into account any money you’ll recoup when your child moves out, including what you spent on groceries (our bill went way down when our daughter moved to college), music lessons, club sports fees, and the like. Tightening your belt by not going out to dinner and reducing family travel also helps. These days we do a lot of camping within driving distance.
Joanna Nesbit is a staff writer for Road2College with a special interest in college finance. She’s the mother of a college sophomore and high school junior. Learn more about her at www.joannanesbit.com and follow her on Twitter at @joannanesbit.
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Originally published at www.road2college.com on November 5, 2016.