College has become less and less affordable, still costing a lot, even after savings, scholarships, grants and federal financial aid are factored in. Looking at your out of pockets costs might have you wondering how your child is going to get an education without breaking the bank. Before you throw in the towel, know that you have options. Parents can cosign a private student loan for their child, take out their own Parent PLUS loan or tap into their home equity, to cover tuition costs. Each option comes with its own set of considerations, so be sure to fully understand each one before making a decision.
Before calling the bank to get an appraisal on your home, be sure to exhaust all the traditional ways you can help your child pay for college. Every dollar you find or save, especially money that doesn’t have to be repaid, is a dollar less you will have to borrow.
Scholarships
The most commonly know way to help pay for college are scholarships. Scholarships are ideal because they don’t have to be repaid. Every scholarship won is less money you have to pay. There are two types of scholarships, need-based (awarded based on demonstrated financial need) and merit-based (awarded based on academic, talent or athletic excellence). Scholarships are a year-round opportunity so encourage your child to apply for as many as possible and not to stop applying until they graduate.
529 Plans and Other Savings
The are any number of ways to save for college but the most common way to save is with a 529 savings plan. This is a tax-advantaged savings account where money earned over time can be used tax free if used on qualified educational expenses. Ideally you open one of these when your child is young but it’s never too late to create an account and start saving. Every dollar matters and even small amounts could cover textbooks or fees or other nominal educational expenses.
Institutional Scholarships and Grants
Several schools will offer their forms of financial aid in the form of scholarships and/or grants to help students pay for school. These can be awarded based on need or merit. For need-based awards be sure to fill out the FASFA® as soon as you can, as financial aid from state schools is typically distributed on a first come first serve basis. It’s a good ideal to check-in with the financial aid office at your child’s school to see what opportunities for aid you qualify for.
Federal Financial Aid
Federal financial aid is the best resource for financial aid, especially for those who can demonstrate financial need. To be considered for federal aid you need to fill out the FAFSA form mentioned above, to determine your eligibility and what types of funding you can receive.
Federal Grants
These are need-based funds that don’t need to be repaid, like the Pell Grant. They are a wonderful way to directly reduce the cost of college.
Work-Study Programs
Work-study allows your child to earn money through part-time jobs on or near campus. These jobs are typically flexible, making it easier for students to balance academics and work.
Federal Student Loans
Federal loans provide financial assistance your child can borrow to pay for school. These loans have more borrower protections than private loans, making them a good option if additional funding is needed.
Cosigning a Private Student Loan for Your Child
Sometimes traditional resources don’t cover the entire cost of college leaving a funding gap, cosigning a private student loan with your child might be a viable option to bridge that gap. By cosigning, you and your child both share the financial responsibility for paying back the loan. This approach helps your child access funds they might not qualify for on their own, particularly if they have limited credit history or income.
Pros:
Cosigning can increase your child’s chances of approval and may provide more competitive interest rates if both of your credit scores are strong. When you both ensure regular, on-time payments, it can help build your child’s credit, laying the foundation for their financial future.
Cons:
Cosigning is a serious commitment. You are equally responsible for repayment, meaning if your child struggles to make payments, your credit score could take a hit. It’s important to note that private loans often lack the flexible repayment plans and protections available with federal loans, such as income-driven repayment options. Financial strain caused by repayment challenges can also lead to stress within your family dynamics.
Federal Parent PLUS Loan
Another borrowing option you can consider when funding falls short is the Federal Parent PLUS Loan. This loan is designed specifically for parents of dependent undergraduate students to help pay for their child’s education costs. With a Parent PLUS Loan, you can borrow up to the total cost of attendance, minus any other financial aid your child receives. This makes it a sure way you can close any funding gaps.
There are several advantages to this loan. It offers fixed interest rates, so your payments won’t unexpectedly increase over time, and includes access to federal benefits such as deferments and forbearance if you hit financial challenges. It also allows manageable repayment terms tailored to fit your situation.
It’s important to take into consideration that there are some drawbacks with this type of loan. The interest rates for Parent PLUS Loans are higher compared to other federal student loans, which, in addition to an origination fee, can increase the total cost of borrowing over time. Approval is also dependent on your credit (you can’t have any major adverse credit history issues on your report such as a foreclosure within the last 5 years), meaning not everyone will qualify. It’s important to know that this loan remains your responsibility as the parent and cannot be transferred to your child later, even once they graduate and start working.
Private Parent Loan
Similar to a Parent PLUS Loans are private parent loans which can provide an alternative way to cover funding gaps. Where the lender for a Parent PLUS loan is the federal government, these loans come from private lenders such as banks, credit unions, or online financial institutions.
One advantage of private parent loans is that they may offer lower upfront interest rates if you have excellent credit. Depending on the lender, you may also find flexible repayment terms, which means you can tailor the loan to fit your financial situation. Private loans tend to have a faster approval process compared to federal loans, which can be a relief if you need funds quickly.
However, it’s important to understand the potential downsides with a private loan. Many private loans have variable interest rates, so the rate can increase over time, making the loan more expensive than it initially seemed. Unlike federal loans, private ones don’t come with protections like deferment or an income-based repayment option , which help if you face financial struggles. Approval can also be challenging if your credit score isn’t strong, and you might even need a co-applicant to qualify.
Home Equity Line of Credit (HELOC)
Another lesser-known option to consider when traditional resources fall short is a Home Equity Line of Credit (HELOC). With a HELOC, you use the equity in your home as collateral to secure a revolving line of credit. This means you’re essentially borrowing against the value of your home, which can be an effective way to fund your child’s college education.
The benefits of a HELOC are worth noting. Often, HELOCs come with lower interest rates compared to other types of loans, making them a more affordable option. The borrowing structure is also flexible, you can withdraw only what you need instead of taking a lump sum, which keeps your debt manageable.
If considering a HELOC be mindful of the risks with this type of funding. Since your home acts as collateral, missing payments can put your house at risk. HELOCs often have variable interest rates, which means your repayment amount could increase unexpectedly over time. Adding this liability to your mortgage can also affect your overall financial stability. Be sure to evaluate how this option aligns with your long-term goals and ability to repay before moving forward.
When traditional resources fall short, there are several borrowing options you can consider that can help fund your child’s college education. No matter which option you choose, look at your financial situation carefully. Only borrow what you absolutely need and use loans as a last resort.