Paying for College in Tough Economic Times

You are a parent with kids and would like them to attend college.  Have you thought about how you will pay for it?  No need to panic as there are a number of options available to you.  We are currently seeing more transparency from colleges and universities concerning their finances, and increased government pressure on them to better control costs should help facilitate the process.

A couple of ground rules for your consideration:

1.     Be involved in the selection process with your child.  Getting “more bang for your buck” is becoming an important criterion in the selection process.  Colleges and universities are coming under more pressure to disclose cost/benefit relationships for their schools.  Outcomes in terms of starting salaries for recent graduates as well as other metrics to make comparisons across schools easier for parents are becoming more widespread.

2.     File for financial aid even if you think your family may not be eligible.  You may be leaving money on the table by not filing.  It is not unusual for families with six-figure income to receive some form of financial aid for a variety of reasons (e.g., multiple kids in school at the same time, dependent parents, and special needs children, etc.).  Private schools tend to be more generous with their aid packages making them somewhat competitive with public schools.  Also, file each year the student is in school. 

3.     Your child’s major or chosen field of study should have some relationship to an occupation where they can earn sufficient income after graduation, and no longer be dependent upon you.

4.     Have your son or daughter buy into sharing in the cost of their education.  They can do this by working part-time while in school, or through student loans or a combination of both.  This rule may be the most important, and parents should be receptive to it and be able to explain the benefits to their children.  Care should be taken to insure that they will not amass more debt than they can reasonably expect to handle after graduation.  Having skin in the game is not a guarantee, but it can go a long way in achieving successful college outcomes.

Two excellent web sites for helping to finance college are www.finaid.org., and www.savingforcollege.com.  These sites provide detailed information for applying for financial aid, scholarship availability and Sec. 529 plan information for tax-free college saving.

I am often asked by parents, if they should borrow from their 401(k) to help pay for college.  This is not a good idea for several reasons.  There are many options available for borrowing for college, but borrowing to pay for retirement is not an option,  Also, a 401(k) loan can turn into a taxable distribution if your employment is terminated, and subject to a 10 percent tax penalty if you are under age 59 ½.  I once worked at the same company where a father of three borrowed from his 401(k) to help pay for the kids’ college education.  The last I heard the kids all made it through college and were doing fine, but dad was still working.  He expects to continue working indefinitely, or until all three children begin supporting him if he lives long enough.