Need College Financial Guru Help!

Parents Forum
1

<p>I spent the afternoon at my sister-in-law's house listening to her lament as to financing my nephew's college education. At the end of it all my head was spinning. Finally I said..."Well you know, I know a lot of smart people. I'll ask them" (smart people would be you folks) ...so don't let me down</p>

<p>Her son should have no trouble getting accepted to a private college next spring with a 46K per year price tag. When it's all said and done the out of pocket will probably be a staggering 35K per year. My brother makes good scratch but they don't have a lot on hand. The plan was to pay down the mortgage and sock extra money into the 401K to supplement what will be a fairly decent pension when dear brother retires 9 years from now.</p>

<p>Here's what they can't figure out.</p>

<p>A) Totally refinace the house taking out the 140K and paying the S's tuition up front to save on future increases in college costs. This college let's them pay for four years in today's dollars up front. That means they'll saddle themselves with a 30 year mortagae @6.25% (or higher) vs. the 7 years they have left on the 4.5% 15 year mortgage.</p>

<p>B)Take a home equity line of credit and draw on that as needed to pay for college cost. But, paying off the home equity loan and meeting other expenses, included the hefty payment associated with the 15 year mortgage would be tough.</p>

<p>C)Take a PLUS loan with an 8% or higher interest rate. The problem here, or so they speculate, is that the interest paid on the PLUS loan is not tax deductable like the interest on home equity or mortgage loans.</p>

<p>D) The last confusing option is to take PLUS loan or some other vehicle that will allow payments to be deferred as long as possible until brother can tap the 401K without hefty penalties. Then spend the bulk of the 401K to pay off S's college expenses. Remember the 401k was really just to supplemrnt a pension. Supposedly they can get by without any trouble on the pension alone.</p>

<p>I just want to go over there and swim. What should I represent to them as thier best option ....so we can finally talk about something else. They are supposed to see a finacial planner in the fall... so go ahead and speculate as to what you think they'll be told. Try not to be to hard on them as they are family.</p>

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<p>Interest paid on a PLUS loan IS deductible -- but the deduction phases out at higher income levels. Your SIL will have to check IRS regs to figure out where they stand there. </p>

<p>Any possibility that your nephew can consider more affordable college options? (public, in-state college or private college likely to offer merit money?)</p>

3

<p>Nephew's parents want the best education for him. They are willing to fund it, but just unsure as to how to do so in the most cost effective manor. The colleges he is looking at don't give much merit and parent's income makes for a high EFC.</p>

4

<p>Well, it doesn't make sense for them to borrow $140K up front to prepay the kid's college -- whatever they gain in terms of security they lose in interest paid on funds that were borrowed before needed. The best thing for them to do is to balance the payments as much as possible between payments from current income and taking on debt. A 30 year mortgage for $140K at 6.25% would result in payments of about $862.00. Let's round that up to $900 and assume they can afford to pay that amount each month out of current income -- a $900 monthly payment will also finance a $72,000 PLUS loan with a 10 year payoff. If they borrowed $28K the first year, then they would have a payment of $350/month -- but the first payment wouldn't be due until February or March -- so they could sign up for a tuition management system to spread out the other $7000 into 10 payments of $700 each -- and their total out of pocket for the first year would be about $9100, averaging out to about $760/month. </p>

<p>Compare that to $10,344 paid out the first year on the mortgage (option A), of which $8700 is interest.... and obviously the mortgage is a bad idea -- they would pay an additional $1200 out-of-pocket and, and would only have paid down the mortgage by $1600 -- so that just puts them further behind. </p>

<p>Will your nephew be eligible for subsidized loans? Does the $35K represent the parental contribution only, or is it the full expected <em>family</em> contribution (i.e., will your nephew be contributing some part of that via loans and earnings?)</p>

<p>They really should look at paying as much as feasible as they go, and then use either the PLUS loan or a home equity loan to finance the rest. The PLUS loan has the advantage of flexibility -- they can consolidate and extend payments later on -- but the home equity loan may be a better choice given their financial situation. Other questions: how much is their home worth in today's market, how much equity do they have (how much is owed on the 1st mortgage) - and do they plan to stay in the home after the son graduates? For example, if they live in a larger home than they will need when your brother retires, and the RE market is strong -- then they really could go with a plan that involves selling the home in 5 years and using the proceeds to pay off debt (whether mortgage or PLUS loans).</p>

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<p>Don't forget that every student can get a Stafford loan, although your nephew's might not be subsidized. There are caps on the amount and it wouldn't cover the entire cost, but I think the rates are lower than for PLUS loans.</p>

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<p>It might be wise for the student to have some "skin in the game" by requiring him to assume some of the college debt. Not an obscene amount but something in the vicinity of $20k. I know this goes against the grain of some families but it does require the student to appreciate the cost and value of a college education.</p>

<p>And if the student does have trouble carrying the debt following graduation because of the entry level job or grad school, the parents are in a position to pay at least the interest on their son's loan and even the principle if need be.</p>

<p>I agree with most who are suggesting a pay as you go approach. That coupled with a tuition pay program which allows the family to pay out the tuition bill over 10 months interest free makes paying for college much easier. Have them look at <a href="http://www.tuitionpay.com%5B/url%5D"&gt;www.tuitionpay.com&lt;/a> to see if their son's prospective colleges participate.</p>

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<p>Are you MA residents or will your student attend college in MA? If so, investigate MEFA.</p>

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<p>Another vote for PLUS and Stafford loans here.</p>

<p>DD qualified for the max subsidized Stafford loan, thus it's like free money for 4 years (see below).</p>

<p>Like the OP's relatives, we are also only several years away from repaying our mortgage in full (25 year loan--5 years left) and have a large amount of equity in our home (no current home equity loan). However, unlike the OP's family, we a smaller gap between what we have saved for college and the total four years' cost. We looked into several options, including refinancing and a home equity loan as well as the PLUS loan. The PLUS loan came out on top for us for two reasons, first, like mortgage and home equity loans, the interest IS tax deductible for us (confirmed by our accountant); the more tax deductions the better! Second, we are currently used to paying monthly h.s. tuition for our daughter, and now that she has graduated, we're putting the $ we normally use for h.s. tuition towards the PLUS loan. </p>

<p>We decided to take out a PLUS loan for 3/4ths of the first year's total (tuition + room and board), and estimate we'll repay it about 2 years. The remaining 3 years will be paid from savings. Thus, if everything goes according to plan, by the beginning of the 3rd year we should be paying tuition bills in full from savings and we can then start repaying her Stafford Loan and hopefully have that repaid in less than a year. If we decide to have her take out a second Stafford Loan next year, we'll just continue our current repayment plan.</p>

<p>Thus by the time she graduates from college (and if everything goes according to plan), she'll graduate debt-free.</p>

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<p>"Her son should have no trouble getting accepted to a private college next spring with a 46K per year price tag"</p>

<p>"Nephew's parents want the best education for him"</p>

<p>These two statements are not necessarily the same thing. First which "private" colleges are you referring to? If these are HYPSMC, or any of the ivies, top LACs or any in the tippy top than I don't think it is reasonable to assume that an acceptance will be no problem. If however you are referring to some privates that do have a higher-end tuition fee but not the same difficulty in gaining acceptance as the ones I have mentioned than maybe that is different. But it would help if the colleges on the possible list were mentioned.</p>

<p>And if these are not the tippy-top ones than merit scholarships would be a factor.</p>

<p>As far as the best education, that leaves a lot of room for interpretation. I have a son at P'ton and another daughter who graduated from a large state public in a very specific science program with major requirements that satisify all 68 school-specific pre-vet requirements. Our large state uni's vet school for DVM requires 68 units in which many of them must be the EXACT class. For example an animal reproduction class in the 400 level is required to even apply. So, if D had attended P'ton like son, she would still have to take over 30 hours at another school (a school with animal sciences classes) to fulfill all the remaining prerequisites.</p>

<p>Her sister, if wanting to pursue the same thing, would also have to add an additional 30-60 units in addtion to her BS and she too is attending a large OOS public university. (Again lacking in courses offered)</p>

<p>So I think saying they want the best education for him his really vague and needs to discussed more thoroughly with respect to major, interests, particular career interests and FINANCES.</p>

<p>Son at P'ton was also admitted to very specific programs, Penn's M & T, MIT's biochemical engineering program, CalTech's and Chicago's math programs and after he figured out that he wasn't ready to decide specifically he choose the school that offered him the best education to explore of those to whom he was accepted.</p>

<p>He still wanted his history, Greek, math, economics, physics, chem and bio. So depending on what your nephew's interests are that would help to decide what would be the "best" education.</p>

<p>And sometimes the best isn't always $45K in tuition. Mini has said time and again what additional educational opportunities can be bought for $45K per year.</p>

<p>Son also applied to financial safeties as well. Our local in-state unis (not an academic safety by any means UNC CH) offer wonderful programs and if the financial package from the $45K schools had been lacking he was more than happy to be a Tarheel! </p>

<p>Maybe you should introduce your nephew and his folks to us (CC). Now that would be one the "best" educations they would all get!</p>

<p>Kat</p>

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<p>Kat said:
"Maybe you should introduce your nephew and his folks to us (CC). Now that would be one the "best" educations they would all get!"</p>

<p>Truly. Calmom, SpringfieldMom, katwkittens:
You guys are brilliant. No wonder you have smart kids.
And thanks to Nightingale for asking a very clear, specific question.</p>

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<p>Hi, from the OP. To answer some questions as to brother and sister-in-law situation. First the colleges my nephew is looking at are expensive privates, but not Ivies. Bates, Colby, Holy Cross, Williams, Vasser, BC, safety, Fairfield... colleges of that ilk. He is a solid student who will in all likleyhood be accepted to one, but as he will NOT be in the top 10% of the applicant pool, he expects very little, or no merit. As nephew's M&D rake in about (rough guess) 165K per year financial aid is probably out of the question. There are two younger siblings, not in college. Nephew is the brainiac of the family. He intends to go in "undeclared" possibly pre-law, but does not want to commit pre-law, yet. I'm assuming he'll apply for a Stafford or whatever vehicle gives both he and his parents the best break down the road. Oh, the house. Yes, it is in MA. They want to stay in house another 10 years. The house is worth about 360K and according to my sister in law they owe 120k with 6 yeaars left to pay on a 4.5%, 15 year mortgage. That, as far as I'm concerned, is cheap money and should not be given up in favor of a new 30 year at whatever the going rate is today..6.25% or something. Paying as you go sounds fine but ponying up another nine hundred a month is, from what I gather, prohibitive. What they seem to want to do is defer payment as long as possible untill they can withdraw the full amount owed from a 401k which was meant to fluff up the decent pension my brother will recieve in 8 or 9 years. It seems the interest the 401k recieves outstrips the interest they would have to pay on a PLUS loan so if the plan works they come out ahead. However, I don't know ANY creditor that is going to allow you to defer payment that long. Should I tell them to look strictly at State schools? I'm thinking a top LAC may be out of thier financial reach. Am I wrong? Anyway, I gave them this web address so they can join the discussion, if they choose.</p>

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<p>We were told by an accountant that early withdrawals from our IRAs would not be subject to tax penalties if the funds were used for D’s college. Maybe this also applies to a 401K.</p>

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<p>I would not borrow or cash in retirement money for a child's education. Full stop. Do you want to risk being a financial burden on your kids in your old age? </p>

<p>I think your relatives may need to assess what is truly value for their money and what they can do without putting the family's financial situation at risk. I do not think, given their obligation to younger sibs and given the situation (e.g. not strong enough for merit aid) that they are being realistic here. I know east coast people have this weird thing about state schools, but they need to get over themselves and look at good values--either downshift to the level that the kid qualifies for merit aid, or look for good deals in state schools. U of Vermont is doing a lot to recruit out of state and is smaller and more personal than UMass. UConn is also investing in quality. U Maryland College Park and St. Mary's of Maryland are also interesting state schools. UGA and UNC are highly regarded. If you are willing to look at the midwest, UMINN just announced they are lowering OOS tuition.</p>

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<p>Mombot's right about borrowing against retirement.
If you borrow from a 401K, and then stop working at the place that provided the 401K, my understanding is that you have to pay the loan back in full right away. Not a risk I'd take in today's economy.
On UGA, from a UGA alum: it's darn big, partly because they seem to like out-of-state students. Many in-state students use the Hope scholarship, so perhaps they need students paying full freight. Regardless of the reasons, many OOS students are being attracted because of the college town atmosphere, the sports, the incredible eclectic music and arts, and some strong academics, including a "Business of Music" major. R.E.M. would be proud.</p>

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<p>If they're not up for a home equity or refinancing, definitely suggest that they check out MEFA. It has the lowest interest rate for loans in Massachusetts, by far. The loans are available to MA residents who go to school out of state.</p>

<p>Also remember that while these schools may hover around 45K now (Vassar's up to $46,600), tuition, R&B and fees are likely to rise every year.</p>

<p>One "financial safety" that your nephew might want to consider is Muhlenberg. Similar in feel to some of the ones on the list - my d liked both Vassar and Muhlenberg. It's tuition is cheaper to begin with, and if your nephew is competitive for the schools listed, assuming decent SAT scores, he should qualify for some nice merit aid there.</p>

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<p>From the OP. Actually UVM is just about as expensive as many private colleges and from what I've read unless you're a NMS or URM the merit is paltry. UCONN is a great suggestion though. According to my sister in law they have what's called a "TSP" which is the GOVT."s version of a 401K. As dear brother will get a GOVT. pension the TSP is merely super cargo which they would prefer to use on their son's college. Unfortunately they can't pull the money out until my brother is 59.5 years old... 11 years away if I'm counting correctly. Need to learn more about this MEFA.</p>

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<p>
[quote]
A) Totally refinance the house taking out the 140K and paying the S's tuition up front to save on future increases in college costs.

[/quote]
Just a note on this option: DON'T DO IT!!! What if the nephew decides to major in drugs and sex and rock'n'roll and needs to take a gap year or two to get his act together? (Things happen!) I suggest that they tighten their belts in the spending department, and see how much they can pony up out-of-pocket. Take DS off the car insurance (save $1500 a year, right there), get rid of junior's car (that's good for several thousand in gas, maint, etc), cut back on meals out, entertainment, etc. Then, DS should apply to a wide range of schools, including at least one instate public school, and several merit-offering out-of-state private schools, (remembering to look for some with more heavily female schools that are courting males, and where he will provide "geographic diversity"), along with his other school choices. (And if that means applying to 12 schools, well, so be it!) A final decision on how to pay can wait until they see if he gets any financial aid or merit money, but PLUS loans sound like a good option to me. (Has he checked out Trinity U in San Antonio? He might get good merit aid there..)</p>

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<p>If it helps, nephew's ACT 28 SAT Mth 640 CR 610. Merit worthy amomg the competitive Northeast privtes mentioned in earlier post?</p>

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<p>
[quote]
If it helps, nephew's ACT 28 SAT Mth 640 CR 610. Merit worthy amomg the competitive Northeast privates mentioned in earlier post?

[/quote]

Probably not. My D is going to a flagship State U (not very competitive) with a 32 ACT and that nets her some merit money (full tuition waiver). Now at one of the smaller regional State Us a 32 would have got her a full ride - I think a 28 would get a full ride at the 2 year college my son started out at. With a 28 he would have to drop his sights considerably for merit money - to a school where a 28 puts him in the top tier of incoming students - which it won't at a competitive school. Of course he does have plenty of time to retake them.</p>

<p>Just as an example - you mentioned Vassar as a possibity - here is a link to the class Statistics for the class of 2010
<a href="http://admissions.vassar.edu/pdfs/class2010stats.pdf%5B/url%5D"&gt;http://admissions.vassar.edu/pdfs/class2010stats.pdf&lt;/a&gt;&lt;/p>

<p>as you can see a 28 ACT puts him below the average of 30 and the SAT puts him in about the 17th percentile range which means merit money will be unlikely. He may need to put a few safeties into the mix.</p>

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<p>
[quote]
If it helps, nephew's ACT 28 ...

[/quote]
</p>

<p>I don't know anything about the NE privates but I do know the statistics from Ohio State.</p>

<p>Their merit scholarship (The Maximus) has a minimum ACT of 31. You also must be in the top 3% of your class. They had 900 students compete this year. 10 got full rides and 70 received full instate tuition.</p>