By Steve Garmhausen
Aug. 9, 2022
The college years have a way of sneaking up on families. Before parents know it, their five-year-old is 18 and is narrowing down their choice of majors. In many of these cases, the family hasn’t saved enough to pay for college, and household income is too high for the student to qualify for financial aid. That can be a big problem: Tuition and fees for a four-year private college education average about $38,000 per year, and that doesn’t include room and board. Many top private colleges estimate total annual costs at more than $70,000.
Pixelrobot/Dreamstime
So for this week’s Big Q, we asked financial advisors: How can clients pay for their kids’ college if they haven’t saved the money and don’t qualify for financial aid?
Jeffrey Swett, senior portfolio manager, UBS: Under the category of banking services, people can use a securities-backed loan. They can use a home equity line of credit. They can also use a 401(k) hardship loan. Those are three areas where you can typically access cash fairly quickly. The key thing to remember, though, is that those possibilities can have tax consequences. So we always encourage people to speak with their tax advisor prior to using them.
The simplest one would be the securities-backed loan because in that scenario you have securities and you’re just borrowing from yourself. It’s the quickest and easiest. The home equity line of credit works as well, but you typically need to go to a closing and it’s a more involved process. I would say the securities-backed loan is probably the preferable way to go of the three.
The other thing that we have seen is family loans. They come in different shapes and sizes, and they can be structured formally or informally. They do happen sometimes when the older generation has money and they’re willing to use it for this purpose. So we can sometimes set up a credit line that is backed by larger accounts. But the obligation to pay the principal and interest on the loan is on the younger generation.
Finally, merit scholarships are not needs-based. So if the student qualifies, a merit scholarship can be quite generous, and they come up typically a year before the student would start school.
Elizabeth Scheiderer, wealth advisor, Sequoia Financial Group: Traditionally, the conversation starts with the idea that the biggest gift you can give your children is not necessarily four years at a college. It’s to not be a burden on them in your retirement. You have to focus on your own retirement first if you want to be able to support them for the rest of your life, not just for four years.
Whether or not you’re going to qualify for financial aid, if you complete the FAFSA (Free Application for Federal Student Aid), you are going to qualify for direct unsubsidized loans. Your student doesn’t have to make any payments while in school, so it basically buys you four to five years of crafting a plan because you can always help your student pay off the loans after school if it’s really something you want to give to your children.
If you really do not want your child to have student loans, then a home equity line of credit is a place to turn. It’s just important to remember that it’s going to be a variable rate, and as we see interest rates go up, you may be paying more on your home equity line than you would be on fixed-rate student loans.
Another area is just stepping back and making it more of a conversation with your child around how you can best limit expenses for the first two years and the option of starting at a community college.
Byron Kaskey, financial advisor, Wells Fargo Advisors: One of the things that people often forget about is the benefit of knocking out the general classes at community colleges, even during the summers when the student isn’t on campus at their four-year college. Classes at community colleges could cost a tenth of the price of taking that class at a four-year school. And students are able to knock that out while working at a summer internship or finding local scholarships.
Lots of local and professional organizations offer scholarships of as little as $50 to $100, but they add up. If you get a $500 scholarship from, say, an organization for accountants or engineers, it could easily pay for one of your gen-ed classes at the local community college. And then it’s a discussion with the family about how to pay for a four-year college when the time comes. Maybe we’re starting to set aside some money for it during those two years.
Erin Wood, senior vice president of financial planning and advanced solutions, Carson Group: I always tell parents that being open and honest with their children is step number one. If you try to hide it, they can’t contribute and they can’t make decisions according to where you’re really at. Families should make sure they’re looking at work that the student can be doing. Plenty of employers now offer tuition assistance and tuition reimbursement for part-time employees. Finding a cheaper housing offering than dorms, whether it’s sharing an apartment or living at home or with relatives, can be a huge cost savings.
And there are always private loans that parents can co-sign for the student. But I encourage families to get the students involved first, before they go down the private loan route. Plenty of schools have work-study options. And for those individuals who really want to live on campus and find a way to lower their costs, being a resident advisor is a very good way to get your housing covered.
If your student gets gen-ed requirements done at a community college, they really need to know what four-year school they’re looking at because not all credits transfer. Make sure the school you plan on attending will accept those credits. If you have to take courses twice, you’re not saving money.
Karl Wagner, senior wealth advisor, Biondo Investment Advisors: My answer would be more in the line of what not to do. What I would not do is encourage my children to incur significant debt with a four-year institution because kids graduate from college with $150,000 or $200,000 worth of debt, and that’s a nasty way to start your working life.
My recommendation would be to have them attend a community college and probably work, and between them and yourself, start to sock away some money over the next two years. And then, obviously, if you do well in a two-year community college, you can transfer into any school you want. Do your best to help them with the final two years of school by paying out of cash flow.
Write to advisor.editors@barrons.com
This Barron's article was legally licensed by AdvisorStream.
Dow Jones & Company, Inc.
