In attempting to find a solution to paying tens of thousands of dollars for education beyond high school, younger generations often turn to their family for answers — and the checkbook. According to a recent survey we conducted, 63% of Gen Z and younger Millennials relied on family to help support expenses related to attending college. This number has risen throughout the years.
There’s no denying the significant cost associated with attending college or students’ increased financial need. In this guide, we’ll discuss parents’ options for paying for their child’s higher education — and risky solutions to avoid.
How Parents Can Contribute to Paying for College
Before cutting that check, parents should encourage students to exhaust other options first. For example, an estimated 1.7 million scholarships are available to new and current college students. That means there is as much as $7 billion in potential scholarship money available for certain demographic groups. Grants are another possible source of free money. Grants are appealing because they typically don’t have to be repaid and are often available at the federal, state, and even local levels.
Once students have applied for applicable scholarships and grants, parents can help cover the remaining cost of college. This number can be hefty, and there are programs to assist parents with this effort.
529 College Savings Plan
A popular choice that helps parents pay for their student’s education is the establishment of a 529 College Savings Plan. The U.S. Securities and Exchange Commission says a 529 plan is “a tax-advantaged savings plan designed to encourage saving for future education costs.” That means parents can start investing in their child’s college education early.
The most popular type of 529 (formally known as a qualified tuition plan) is the Education Savings Plan. Account holders set up an investment account that accrues interest over time. When it’s time to pay for college, the initial investment has, ideally, grown significantly. As long as students use the funds for education purposes, such as tuition and room and board, families can withdraw from a 529 penalty-free and might benefit from state and federal tax advantages.
The 529 Plan is ideal for families who want to prepare their younger children for future education endeavors. However, this option may not be as beneficial for families with students close to high school graduation.
Parent PLUS Loans
For parents who need more immediate help funding their student’s college education, a Parent PLUS Loan may be the way to go. Funded directly by the U.S. government, these loans allow parents to borrow money for tuition, room and board, and other education-related expenses.
What makes Parent PLUS Loans unique is that while the money goes towards their child’s education, the loan itself is only in the parent’s name. There’s no co-signing from the student, which means parents are 100% responsible for paying back the loan.
This is a less risky option for students because they can’t default on a Parent PLUS Loan, putting their financial future on the chopping block. On the other hand, it’s also important for parents not to overstretch themselves with a loan they will have trouble making payments on.
Another benefit of this type of college funding is the flexibility, as there are various repayment plans available. Interest rates are fixed over the life of the loan. To apply for a Parent PLUS Loan, parents must complete a FAFSA form and credit check.
Private Parent Student Loans
Parents don’t have to rely solely on the government’s federal loans if they need further assistance. After exhausting federal loan options, they can look into private loans specifically meant for parents.
Many private lenders, such as banks, credit unions, and online lenders, offer both fixed-rate and variable-rate loan options. Getting approved can be quicker than Parent PLUS Loans, but interest rates are likely higher. A riskier choice, private loans are an option if a family needs the funds fast. Fixed-rate loans are preferable since interest on variable-rate loans can be volatile during periods of high inflation or economic uncertainty.
What to Avoid When Paying for Children’s Education
As parents brainstorm ways to help their students pay for college, it can be tempting to turn toward “fast cash” options. However, doing so can have powerful implications that result in financial hardship for families. Whenever possible, avoid financial mistakes by taking these funding options off the table:
Using Credit Cards
To put it straight, credit cards are not meant for a child’s college tuition. If parents can’t pay the balance off during one payment cycle, interest charges will rack up quickly. With the average credit card interest at 18.17% as of August 2022, funding college with a credit card is an expensive solution.
Tapping into Home Equity
Using funds from home equity to pay for college can sound appealing, but doing so carries high risks. After all, the line of credit is tied to their physical place of residence. If parents default on the loan, they could lose their house. For that reason, experts recommend exhausting all other options before compromising home equity.
Using Retirement Funds
Like the home equity loan, opening up access to a retirement fund can be tempting for parents. The nest egg that’s been growing for many years may seem like the perfect solution to pay for a child’s college, but parents should beware.
Taking money out of a retirement account means tax implications if the borrowed funds aren’t paid back within a specific timeframe — usually one year. Coming up with a large amount of cash in such a short period may become an enormous challenge that can put parents’ own financial future at risk.
It’s important that students first try to find scholarships and grants to help offset the cost of college. Then, parents can consider 529 College Savings Plans, Parent PLUS Loans, and private student loans to take care of the rest.
Helping children pay for college may be a family’s priority, but making risky financial decisions to do so can be costly. Using credit cards, home equity, or the retirement savings parents have worked hard to build up can cause devastating results. It’s critical to be smart when determining the best way to pay for college and seek financial guidance from a professional if needed.