Use savings, get loans, or do both?

Paying for College
1

<p>The number one rule for parents is to save for retirement rather than college. In retirement, you can’t go to a cheaper college, get a loan, a grant, a scholarship, or your parents’ money, or have a job to pay living expenses.</p>

<p>But if you have savings, getting a loan for college in order to keep the savings for retirement will cost you money you could have had for retirement.</p>

<p>If you think your savings will earn an average of 6.8%, and student loans are 6.8%, how do you determine the price difference?</p>

<p>Do you pay for college out of savings, losing the principal on investments that would make perhaps 6.8% per year average until retirement?</p>

<p>Do you pay for college with loans, which have an interest rate of 6.8%, but which would let you keep your savings and its earnings until graduation when loan payments must be started?</p>

<p>Do you mix both depending on how much money you have in retirement accounts and how much you still need to save for retirement?</p>

<p>Do you have your child take out a subsidized Stafford loan, then gift them the money when they graduate so they pay off the loan immediately, preventing interest payments, but letting you keep your savings and its earnings until then?</p>

<p>Do you do something else?</p>

2

<p>If the retirement savings are in a qualified retirement account (e.g. IRA (Roth or non), 401k, 403b), then there can be big tax repercussions to taking out money prior to retirement. There are taxes that must be immediately paid, there may be penalties, and if you’re taking out funds that are earning interest tax-free, you’re giving up the tax-free earning power of that investment. There may be some exceptional circumstances where that’s justified, but paying for college doesn’t make it in my book. I’d sooner be a cosigner on loans, and then help pay them back when I started taking withdrawals from those accounts. If the loan amounts were too large, I wouldn’t be cosigning. I’d be telling my child that the school was unaffordable. </p>

<p>My children don’t need my permission to take out Staffords (though they do need me to file the FAFSA to do so). If they did, I might decide to gift them the repayments. Or I might have them repay it themselves. </p>

<p>If your retirement money isn’t in a tax-advantaged retirement account, you’re not getting 6.8% these days, and your FAFSA is going to assume that 5.6% of that savings goes towards paying for college each year. I’d go talk to a flat-fee certified financial planner, because I’d need to know what’s best to do.</p>

3

<p>My kids are not in college yet,</p>

<p>but our plan is to have our son take out Stafford every year so that he has at least some skin in the game. We will pay the rest out of current earnings or savings. I already told him that I will be only paying equivalent of state flagship tuition and maybe dorm room (he can commute to state flagship). On top of Stafford at the very least my son will be responsible for food, books and personal expenses. </p>

<p>Because my son’s loans are going to be unsubsidized, I am planning to at least pay off my son’s interest each year while he is in college. If he does well at school I am also planning to pay off his Stafford. I am not sure yet if I am going to pay it off at the end of each year or upon successful completion of his degree.</p>

<p>I might change my mind in 3 years, but at this point this is the plan and my son knows it. I will not be cosigning any loans, nor will I be taking out parent PLUS loans, so if my son wants to go OOS or to private, he either has to get merit-based scholarships or win the lottery.</p>

4

<p>I’m on the same page as Lerkin. We had out son take out the Staffords, somehow we got some subsidized–probably the 2 in school at once did it. The deal is that we will pay them if he does well. If he screws up, they are his. We will give him the $ and he can pay the loan off or use the $ toward a house down-payment or whatever. If for some reason we don’t have the $ to pay them off and he has done well then I expect we will make the payments. Hopefully the interest rate stays low on them for 2012-13. If so, it might be worth making the payments and keeping $ invested…have to see what happens I guess.</p>

<p>We didn’t take any PLUS loans or anything because I can’t see the advantage. I’d rather risk using home equity line of credit at this point, unless I see signs of interest rates climbing. </p>

<p>Son is also at an an in-state public like I think lerkin is leaning towards. </p>

<p>One interesting thing I did was to open a new credit card last August. It was one year of zero interest and we got lots of rewards points for spending a certain amount in the first 60 days. They paid ME to “borrow” the money for a year. Obviously, we are paying it off throughout the year, but we didn’t have to liquidate the whole amount and can pay part of it with current income.</p>

<p>S1 did 2 years at CC and saved us a lot of $. It was convenient (1 mile away!), easy to transfer, and we weren’t sure if he was ready for 4 yr school. (not studious enough…)</p>

5

<p>

That’s all well and good assuming you have the equity. If you are one of the unfortunate few like us, the housing market spiraled downhill after we bought ours and the house is worth $70K less than what we bought if for. Some of us take the PLUS loans out of necessity.</p>

6

<p>We do have some money that is specifically targeted for college. No where nearly enough, but some. We also can pay a certain amount out of current income, mainly because we have been paying for private schools for our kids for a long time. So that payment will just go towards college costs. Any extra money from the prior year, we throw into savings and that goes towards college costs. We also decided that we could borrow $20-30K total per kid for college. We can do this and still put away what we have planned for our retirement. Clearly we could put more away towards retirement if we didn’t pay for college and private school, and if we did not put away what we are, we could pay for any college our kids choose, so it all comes down to what we decided we would need for retirement purposes It would foolish not to get the full IRS deduction and employee match ,so that is the base of what our retirement plan has. DH then structured a model of what he thinks we will need to be comfortable, have a bit of a cushion and yet take into account that our needs will be less since hopefully the kids will be self sufficient. That model is really the crux of what determines how much you have to save. We are on the low side of what we want. Doing this we can afford to pay $30-35K a year for our kids college. Actually, the way things have gone, it’s really more like $25-30K but we made the deliberate decision to keep it at the original amounts. The temptation to up it has been high, I can tell you, and maybe I will. But that is how it now stands.</p>

<p>In doing this we borrow about $5-6K per kid .per year in college which will be paid over 10 years after our kids graduate.We don’t borrow the money until the end of the year so that the interest does not start until the last minute. We have the child take out the loan in the form of the Stafford because the interest rate is slightly lower than the parent plus loan. If the student needs to take out the loan to pay his portion of the cost, then, we will take out the PLUS instead. This year, one of mine did need the STafford money for himself as he had to quit his job, and some estimated costs went over, and his summer job is going to be curtailed and he has an opportunity he wants to pursue this summer. To be on schedule, he needs $3500. So we borrowed $5K from PLUS. The total loan burden for this year will be the full Stafford amounts for both students $13K + $5K from PLUS. Of that, my one son will get $3500 of the proceeds, and DH will track the payments for that amount for him, which he will pay to us. We will pay all of the student loans, regardless whose name they are in, and any amounts the kids needed to pay their share, they will just pay us separately. Keeps it organized though not simple. s</p>

<p>It was a tough year for us, and we needed the extra due to having 2 in college this year and we are going to be paying a bundle for all of us to go to the older one’s graduation next month. I had kind of hoped to swing it out of discretionary funds, but it didn’t work that way, so the extra we took out from PLUS will help us out. I just made the final payment for this year’s college costs, so we are good that way. The big deal now is now much extra money if any, will we have for this summer for the youngest one (high schooler) to do some things. Too young to get a “real” job yet, just 14, wants to go to a sports camp and do a few other things.</p>

<p>We do pay a premium to manage our costs, in terms of interest, but I feel it is worth it becomes it keeps things straight so we can see where we incurred which cost. We will be finishing up payment of $40K borrowed by and for S1 from 2002-2006 in 2017 which is in 5years. At that time we’ll also have started payment of S3’s loans of $30K for 2008-12 which will commence in 2013. We’ll have four years of two school payments, but I am optimistic that we won’t need to borrow any more money in that time. When our youngest goes to college, I am hopeful that we will be in position to pay whatever it costs for him to go to school, something we could not do with the middle three. However, all three say they are going to their first choice schools and are happy. We are an upper income family with a huge house/tax bill, and a house we can’t unload right now. </p>

<p>No subsidies on the loans. If both of the kids currently in college were paying full sticker price for a top priced private, they would be eligible for loan subsidy, workstudy, maybe a bit of financial aid, but one is at an OOS public and the other has a merit scholarship which brings their cost within our EFC for each of them.</p>

7

<p>Cptofthehouse,</p>

<p>a bit of (unsolicited) advice: Have your teenager son volunteer. My son is 14 (going to turn 15 in August). He is going to volunteer at the local zoo and he was able to score volunteer interviews at 2 hospitals (hopefully he will get accepted at one - those are tough to come by).</p>

<p>In the last 2 years he volunteered at the library and if hospital falls through, he will go back to the library.</p>

<p>He likes the setup as it allows him to still hang out with his friends on his off days and he loves animals (hence the zoo) and is interested in medical career. </p>

<p>Also, check out local U (if you live close by). Sometimes they have very inexpensive programs for high schoolers. Last two years my son participated in Math camps that only cost us $50 per week. This year, he could have applied to “Carriers in Engineering” camp (only $50), but decided against it as he banked on getting a hospital gig which would have interfered with Engineering Camp (and $50 were nonrefundable).</p>

<p>P.S. We also put maximum (deductible) amount of money each year into 401K and Sep-IRA. Both my husband and I are somewhat young (under 40), so I don’t count on Social Security to fund my retirement (and it is foolish not to take advantage of tax deduction).</p>

8

<p>Thanks, Lerkin. Son loves sports. Wants a sports camp of sorts. Also is taking a course this summer offered at a reasonable price and has applied for some assistant jobs that he hopes will lead to a paying position when he is old enough. All of my kids have worked heavily in the summer.</p>

<p>You are doing well as young folks. I’m an oldie and will be one of those in my 60’s–I’m almost there, and paying student loans. I expect we’ll be paying them till we are in our mid seventies as we have this old age baby.</p>