Shawn Dempster’s eagerly anticipated freshman year at Widener University in Chester, Pa., begins this month. So does the enormous chore of paying for it.
Tuition is $12,350. Transportation, books, supplies and personal items will claim another $2,300 or so. (Room and board would add almost $6,000 more, but Shawn will sidestep that expense by living at home.)
Still, the Dempster family faces a first-year outlay of at least $14,650. Where is the money coming from?
Like most families faced with today’s college bills-Widener’s tuition is just above average for private colleges-the Dempsters are tapping several resources: Shawn’s money; savings his parents, Tom and K.C., earmarked for college; a $4,000 scholarship from Widener; and a $2,265 student loan.
No matter how much planning you’ve done or how much money you’ve managed to save for your children’s college education, coming face-to-face with the bills can be a shock. It also signals that it’s time to shift gears: from saving for college to paying for it.
The big question is whether your child qualifies for financial aid. Even if he or she was turned down this year, don’t assume the answer will always be no. If there’s a chance your child can qualify for aid, use any savings in your youngster’s name before tapping other savings.
It’s a mistake to spread the student’s money over four years. By using it up in the first year, says Joseph Re of Octameron Associates, an Alexandria, Va., publisher of financial aid guides, you accompllish two goals: You delay tapping other assets, and the student becomes eligible for additional financial aid once his or her savings are gone.
Think twice, too, before you dip into the money you have set aside for tuition. Say your college money is in a stock mutual fund that has appreciated smartly. If you sell shares to pay for college, you’re buying double trouble: You’ll pay for taxes on the profits, and the income itself will count against you in the financial aid formula.
“In some cases, it’s better to borrow temporarily than to invade assets,” says Raymond Loewe, president of College Money, a financial planning firm in Marlton, N.J. When senior year rolls around, use your accumulated profits to pay off the loans. This decision depends, in part, on the return on your investments compared with the cost of borrowing.
“Why break a portfolio earning 8 or 9 percent if you can borrow at a lower rate and let your money continue to grow?” Loewe asks.
If you liquidate investments, choose those you sell with an eye on the tax ramifications. If U.S. savings bonds have been part of your college savings strategy, start by redeeming newer bonds with a 4 percent guaranteed interest rate.
This will have the smallest immediate tax impact and will keep older, higher-yeiding bonds in your savings mix. Another reason to redeem newer bonds first is that the earnings on those purchased by parents after Jan. 1, 1990, and used for tuition and fees can be totally tax free. (That break is phased out as adjusted gross income on a joint tax return rises above $61,850.)
It’s not too late to borrow for this fall’s tuition. True, the money that comes directly from colleges is probably spoken for. But Uncle Sam always has money to lend, via Stafford loans and the PLUS (Parent Loans for Undergraduate Students) program.
Subsidized Stafford loans are part of financial aid for eligible students. Unsubsidized Staffords are available to everyone. A freshman may borrow up to $2,625, a sophomore up to $3,500, and other undergraduates up to $5,500.
In the subsidized loan program, the government pays the interest while the student is in school and for six months thereafter. Stafford loans carry a variable interest rate, which changes every July 1; the current rate is 7.4 percent with a cap of 8.25 percent. Students must repay Stafford loans within 10 years of graduation.
You apply for Stafford loans through banks and other financial institutions after the school certifies that you are a student, except at the hundred or so schools in the Federal Direct Student Loan Program. A financial aid officer at your child’s college can tell you whether the school participates in the director program or refer you to participating lenders.
If you apply for a loan now, the money should be available within four to six weeks, and the college should give you temporary credit while the loan is being processed.
There’s no dollar limit on PLUS loans; parents can borrow up to the entire cost of education, minus any other financial aid the student receives. The variable interest rate is currently 8.53 percent, capped at 9 percent.
A big difference between Stafford and PLUS loans is who is responsible for repaying the debt: Students must repay Staffords, parents must repay PLUS loans.
Although government loans generally offer the lowest interest rates, private lenders go out for college business, too.
Knight College Resources (800-225-6783), for example, offers the AchieverLoan, designed to cover one year or the full course of education. The repayment period is 15 years. Parents can set up a line of credit for four years, then take disbursements each semester.
This is an unsecured loan, but in 29 states it can be converted into a home-equity loan. That would make the interest-7.25 percent for the first year, then variable at 4.5 percent points over the 13-week Treasury bill rate-tax deductible. Through the College Board (800-874-9390), Knight offers the ExtraCredit line of credit, with similar terms.
To spread payments over a longer period, consider the Excel loan from the New England Education Loan Marketing Corp., or Nellie Mae (800-634-9308). Repayment periods vary depending on how much you borrow. For example, if it’s more than $20,000, the repayment period is 20 years.
An interest-only option allows you to keep monthly payments low while the student is in school. Interest-rate choices include a monthly variable rate of prime plus 2 percentage points and a one-year variable rate of prime as of Aug. 1 plus 3 to 4 points.
Borrowing against your own resources may be your best bet. Home-equity loans top the list for most parents because interest on up to $100,000 of such debt is tax deductible. You can establish a home-equity line of credit and draw on it for college payments as needed. Variable interest rates now run about 1.5 percentage points over prime. Remember that a 7.5 percent deductible rate in the 28 percent tax bracket is equivalent to a 5.4 percent non-deductible loan.
Your retirement plan at work might be another source of college cash, though one to be approached with caution. Most 401(k) plans permit you to borrow half of your balance, up to a maximum loan of $50,000, at rates that currently run one point above prime. The interest is not deductible, though, and the loan must be paid back within five years.
