First time college parents. I need some advice on how to go about dispersing our 529 and taking out unsub loans and avoiding extra interest fees etc. She is UMD Engineering and will be expected to be doing paid internships during the summers. I do not want to estimate her putting in money and applying for internal scholarships in advance while doing this financial planning although I do expect her to be contributing during school so that her loans after school are less burdensome.
Do we front load 529 funds to avoid beginning interest? I am thinking we have to start taking out the unsub loans freshman year because we have to do the 5500, 6500, 7500, 7500 right? Then we fill in the rest with the 529 money until it runs out and then cosign a loan? We belong to a credit union. We are in good standing with them with good credit so I am hoping that we will decent deal with them. From what I have been reading we do NOT want a parents plus loan? What other options are there? Do we take out a term life insurance policy on our child? I need to check on when we pay but generally is it closer to the end of summer? How about when do you apply for the federal unsub loan? How about making interest payments? I think the unsub loans start accruing interest right away? Can we chip away at that a bit of the principal? Thank you!
University of Maryland COA (Took out indirect) $50, 208
Yearly Merit $12,500
529 $90,000
Ds end of summer savings $3,500
Your kiddo can take a $5500 unsubsidized Loan freshman year BUT can pay the interest off each year…thus you would be subsidizing it. That is what we did. It was not a huge amount annually.
If I’m reading this correctly, you have a little over $20,000 for each year in your 529. And you kid got $12,500 merit. That totals $32,500. Add to that the $5500 Direct Loan…and you have $38,000 covered, right?
Where is the additional $13,000 coming from?
My opinion…the $3500 your daughter earns will be used for books and spending money…she will need that too.
@thumper1 yes we are OOS. We do not have the extra 13K coming from anywhere for the first year at least. That is why I am asking if we should begin by front loading the 529 funds. So instead of putting in 20 the first year- we put in enough to cover the first full year and so on. After freshman year she will work that summer and be expected to have additional money to contribute but I do not want to count on that until it is in hand. I want to wait to take out loans until the 529 is exhausted to avoid interest as long as possible. Does that make sense? I also want to start paying interest and making payments sooner if that will save exponentially.
A student must take the $5500/6500/7500 each year, because you cannot take them later (unless she goes to school more than 4 years). I agree that at least half of the money she earns she’ll need for incidentals, books, and other expenses, especially if she is not going to work while in school. Working 10 hours per week is not a burden and I think it helps students understand the value of that $5 cup of coffee or $15 movie ticket.
Most schools have you pay 1/2 the yearly fees either just before school starts or just after. I had one of each, one due mid-August, one mid-Sept. Check with your 529 firm to see how to get the money to the school and how long it takes.
If you are going to borrow, I would put it off as long as you can, ‘front loading’ the 529 money. PLUS loans are not horrible and they have some benefits private borrowing doesn’t, such as you don’t need a life insurance policy on the student. The interest rate is higher than you’d pay on secured borrowing (HELOC, for example).
Your daughter is also likely to make more money in the summer so may be able to contribute more toward her costs as a junior or senior.
Here is what I see happening in your plan…you will exhaust your 529 money and your kid will still have at least a year of college to finish.
You owe $38,500 (after the $12500 merit is applied).
If you take all of that from the 529, you will exhaust that account in 2 1/2 years or so (remember, costs will increase annually too). Then what?
Were you planning to contribute any money out of current earnings or savings?
How much monthly do you contribute to the 529? Will that amount be diverted to college costs?
Do you have younger kids who will attend college in the future?
Like i said…your kid can take the Direct Loan of $5500 and at the end of the semester or year, you can pay the interest…so only the principal will be the left. That is what we did. We basically subsidized that loan ourselves.
My $13,000 balance includes your kid taking the Direct Loan.
What are the college Direct billable costs…tuition, fees, room, board?
Have you checked to see about health insurance? Will your OOS plan suffice in MD or will you need to purchase a school plan?
@thumper1 yes, we have 3 other children that we are saving for college. We are not putting any further funds into D1’s 529. We will contribute to paying her interest and will cosign the loan when the 529 funds run out. We will not have any additional money to give her. Here is the breakdown of the current rates:
Annual tuition and mandatory fees3 $36,208
On-campus residence hall room, cable and phone $7,646
Meal plan (Average) $5,104
I am not sure about health insurance. I am not sure why it would not cover her at school? Do most health insurance companies not cover kids at school?
Since she will be out of state, many insurers do not have provide coverage out of state. Read your policy. You also have to check with UMD to see what they require for insurance coverage and provide proof of that or buy their policy for more $$$$.
You need to check YOUR health insurance plan to see if they have in network coverage near UMD. If your plan has this (some do) then you need to check to see that you have the required deductible and coverage they state you need to have.
So…you have about $50,000 in billable costs you will get from the college. You have $20,000 or so from the 529 (if spread over four years), and the $5500 freshman Direct Loan. And a $12,500 merit award. So…you have $38,000 covered.
You certainly can take the remaining $12,000 or so from the 529. And you can also do so for her sophomore year. And you can then use the balance for her junior year…and then take loans to cover whatever is left.
But like I said…my calculations include taking the Direct Loan from the get go.
@mommdc do you have an better way for this family to fund these costs? Should they use up the 529 first…and then take loans later.
@mom517 one thing to remember…the Direct Loans are in your daughter’s name only. But she has to take them for the academic year in which they are offered. In other words, if she doesn’t take that $5500 Direct freshman Loan…she loses the ability to take that loan amount.
@thumper1 yes : ) thank goodness! I am guessing loans later? Guess we will see what the answer are here… She will be expected to work and contribute at the very least during the summers towards her tuition. That will decrease the amount of money to be borrowed. Not sure if this is a factor but we will have children entering college in 2021, 2023, and 2027. We have 90k for D2 and a total of 100K for the two youngest. Will they all go to school? Who knows? Our house will be paid off when kid #4 goes off to school.
@mom517 — Contact UMD to find out what paperwork they require so you aren’t required to buy their health insurance and be sure to submit and get it approved prior to their deadline.
As was posted you have to be sure your policy will meet UMD’s requirements in terms of deductible and other requirements, plus submit required paperwork to avoid being charged for UMD insurance.
When you have a second child in college at the same time as your first, your FAFSA EFC will be less. BUT this likely won’t translate into much more need based aid at UMD because they don’t meet full need for all.
So have a plan for paying for both kids when her time comes…with the available money you have.
I know you went back and forth regarding college choices. I thought you had picked an affordable option. Is it?
For the first year, if she really does earn $3500 this summer, I’d have her pay $1000 per semester toward the billed amount. If she needs more money (good deal on the books being paid for!) she can earn it.
If it were me, I’d take the $10k out of the 529 rather than borrow it BUT I’d try very hard to earn $10k and pay $1000/month. I know that might be hard because you have other children, but that’s what I’d try to do. Or at least 1/2.
Don’t forget to have a sitdown to evaluate exactly which financial instruments are in that 529 account. Markets go up and down, but tuition only goes up (or so it seems). If you’ve had a period of high growth in whatever portion is in equities (probably some piece of it), lock those gains in NOW by shifting over to money market type investment options.
People got caught badly in 2008/2009 assuming “My kids 529 plan is worth 100K” but if the market pulls back, and you’re stuck in an equity heavy plan (which is appropriate for an 8 year old, less appropriate for a 17 year old) you may actually have 85K in that plan.
Review it soon…
Our 529’s were less volatile than some (we’re pretty conservative) but I know folks who felt badly burned when they needed to shift to cash to pay tuition.
While you’re at it- take a look at your life insurance policies!
Age based 529s should have shifted D1 into FDIC, or is that not a standard protocol? It certainly is prudent to assess it, as the temptation is to actually keep it earning while the market is so chipper. This would only work if the money wasn’t needed.
Not standard; it will depend on the particular 529 plan.
The 529 plan I am most familiar with has three risk levels of age-based options: aggressive, moderate and conservative. In the moderate level, the 18+ age bracket is 40% guaranteed interest (currently 2.1%), 36% bonds, 9% inflation linked bonds, 13.5% equities and 1.5% real estate. None of that is FDIC insured.
Ah, ours just went into 100% FDIC at 18 (I can and did change that). The CDs I found
beat that once we factored in costs (it is a cheap one to run)… and that we now no longer have any state deduction benefit it isn’t really worth it for the return on FDIC type rates tax shelter. I would rather just piddle around with my own CD ladder. If we had state tax bonus I would keep it but not in FDIC.