Our daughter has chosen a university and received her award letter. She received a $5,550.00 unsubsidized loans and a remaining cost of approx. $15,000 for the year. We have approx. $24,000 in a 529 in my name, listing her as the beneficiary. We would like her to take on some loan responsibility however, it seems like she should not have interest accruing and we should use the 529 (it is in the process of recuperating after the recent market decline).Since it is unsubsidized, is this just a bad deal for her and should not allow her to incur debt without first depleting the 529. My understanding is that a 529 cannot be used to pay down loan debt. Thanks!
So the actual price is $20,550 per year, for a four year cost of $82,200 (plus any cost increases), and you have $24,000 in a 529 account for her?
That means some combination of the following are needed to make up the remaining $58,200 (plus any cost increases):
- Federal direct loans ($5,500 first year, $6,500, $7,500, $7,500 remaining years for a total of $27,000).
- Student work earnings ($3,000 per year is commonly assumed; up to $5,000 per year including summers is sometimes assumed if she is committed).
- Additional parent contribution from current income.
Tuition and fees (excluding books and living costs) is $32,110. She has received $9,000 in scholarship money so it is $23,110 per year (not including books and living). So we basically have 1 year saved. She did not qualify on the award letter for any work study. So if we pay the 1st year tuition with the 529, I am assuming that she will forfeit the 1st year loan federal loan?
Yes, she forfeits any loans that she doesn’t take in the current year. She can’t “borrow more” later just because she skipped taking the loan during an earlier year.
So…you need to think about how the later years will get covered when the 529 is depleted and she can only borrow 6500 or 7500 per year.
You might consider having her take the loans and paying the yearly interest on them so it doesn’t accrue. If you don’t later use the loans you have the money to just pay them. She can work, however, unlike work study it will be considered income for her for FAFSA purposes. You could consider her contribution from working her “skin in the game”. There are ways she can look into ways to reduce her costs such as becoming an RA. It’s not a guarantee as such positions are usually popular just for that reason. There are also things that may help you to pay some of her costs. Having a child leave for college often reduces expenses at home. One less person to feed, water and energy cost are reduced slightly, there can be tax breaks that can be applied to her education, activities that you had paid for will no longer exist, etc. Good luck.
Are you saying that your only contribution will be the funds in the 529 account, or just that you want your daughter to take loans so she is invested also? If all that is available is the 529 account, then your daughter can’t get enough loans to pay for this school. As for the loans, it is a “use it or lose it” thing, and she would have to borrow the $5500 freshman year or not at all. If she will need the full $27,000 of fed’l loans, she should borrow freshman year even if interest is accruing. It isn’t likely that she herself has another source for loans, although you probably do.
I thought the total max federal loan amount was 31,000…for those kids that don’t get out in 4 years…
It appears to me that the college is assuming that the parents can come up with more cash from current income. That may or may not be true, but I hope the parents will consider putting up more cash if they can.
Interest on Stafford loans is currently 4.29%. Is your 529 plan returning at least that? If not, makes no sense to borrow the money if you have funds available. If your 529 is returning more than that, you have to decide if you want your child to have the responsibility of the loans when she graduates.
I think most people do try to spread out the 529 funds at least over a few years, so borrow the stafford loans, pay some from current earnings, some from 529, but it might be the right choice financially to use it all up in year one. If you deplete the 529, will it change your EFC enough so that loans in the future might be subsidized?
My calculations show that taking the maximum stafford loan, the 529 still gets depleted in paying for semester 4.
Colorado 529 Stable Value fund pays 2.54%. I assume that’s the best you can get.
He needs to take the loans, and need to take some loans yourself.
Rough numbers assuming loans and payments June 30 and Dec 31
June 30 2016, Loan Balance 5500, 529 Balance 17945
Dec 31 2016, Loan Balance 5619, 529 Balance 6778
June 30 2017 Loan Balance 12240, 529 Balance 469
Dec 31 2016 Loan Balance 12550…
I don’t see how Semester 4 gets paid for.
I assumed 4.29% for Stafford loan and 2.54% return on 529.
Student needs maximum borrowing, parent needs to supplement no matter what.
I’m in the same boat. I started 529s for my kids when they were born, unfortunately what would have paid for 4 years of tution + room and board 18 years ago, barely covers 1 year of tuition now. I can finance year 1, but no idea where years 2-4 are coming from. According to the FAFSA I have an extra $38,000 of my salary that I should earmark for college. Not sure how a form to finance higher education could be so inaccurate. If I had an extra $38,000 lying around every year I probably wouldn’t be applying for financial aid or stressing out about this. Oh well, I guess that is what 2nd mortgages are for.
@JohnnyK2016, another option (if no merit scholarships or cheap in-state options) is 2 years of CC first (more workable for some majors than others, though).