Even with scholarships and grants, you may still need options to pay your tuition bill.
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So, you thought you were all set to pay the college tuition bill with her scholarships, student loans, and your college savings accounts. When she arrived on campus to get her dorm keys, they told you that she still owes the college for this quarter. After reviewing her college invoice, it looked like all her aid was posted to her account, but there is still a gap. What next? Consider these options if your family finds yourselves still trying to pay for college:
1. Use more of your savings now.
Consider whether or not you want to distribute your college savings evenly over the course of the 4 years of college - - that is quarter by quarter or semester by semester. Some families use these funds to pay for college costs until they are all gone, whereas other families even spread the funds to prevent taxation based on large distributions of these funds. The best speed and timing of payments from college savings funds are often dependent on the terms and taxation of the investment funds themselves.
2. Check out the college’s tuition payment plan.
Pretty much every college has a tuition payment plan to spread payments over three to six months for a specific enrollment period. Plans may range in cost from $20 to $100 per semester, so ask her college for more details. The start date and end dates vary as well. There are some colleges where all payments of the plan must be made before the first day of college for the quarter or semester. Depending on the amount you owe and terms of the college’s tuition payment plan, these may not be the best way to get a zero balance on that tuition bill. Tuition payment plans can be a great addition to your paying for college plan.
3. Decide if you want to use your credit card.
Many colleges allow you to pay for her college tuition bill with a credit card, but a few still don’t allow you to pay for college using them. If you are using a credit card to maximize your rewards program and pay off the balance on your credit cards monthly, this can be a real win. With the average credit card interest rate at 17.7% according to CreditCard.com, making minimum payments on your credit card for college expenses can cost you a pretty penny. Also be aware of an “convenience fees” that the college charges for use of the credit card. If you are paying a fee to use a credit card and not paying off the balance, your credit card rewards may not be worth it.
4. Apply for a student loan or parent loan.
Even if your student has borrowed up to the annual loan limit with the Federal Direct Student Loan program, there are other education loans available to pay for college costs. In 2019-20, the Federal Parent PLUS Loan has 7.08% interest rate with 4.236% origination fee. There are also co-signed Private Student Loans and Private Parent Loans. According to College Ave Student Loans, Private Student Loans can be as low as 4.21% variable interest rate and no fees and Private Parent Loans can be as low as 5.48% variable interest rate and no fees. Depending on which loan type and your creditworthiness, these educational loans can be great ways to pay off the college tuition bill. To understand what the potential monthly payment after borrowing these loans for all four years based on your self-reported credit strength, check out our free calculator to understand the financing cost of using loans for your paying for college plan.
5. Consider using your home equity.
With interest rates as low as 5.76% for a fixed rate home equity loan or home equity line of credit (HELOC) according to ValuePenguin, this may be an attractive option. According to Sallie Mae’s 2019 “How America Pays for College Report,” 5% of parents use home equity loans to pay for college costs. Since the interest that you pay on a home equity loan can typically be deducted from your taxes, this can be a great way to finance. However, remember that closing costs typically apply to the tune of 2% to 5% when you are calculating the total financing cost of this form of credit. Depeding upon your credit strength and current equity, this may be a part of your paying for college plan.
6. Withdraw from your retirement funds.
If you have been diligently socking away retirement funds, you may be tempted to withdraw funds early to pay for her college costs. In Sallie Mae’s most recent report, 4% of parents use retirement funds to pay the college tuition bill. The problem with this approach is that if the parent is under 59 ½ years old, then there is a 10% tax penalty to their ordinary income taxes on that amount of the 401(k), 403(b), or SEP IRA distribution. This is why many families do not use this option for their paying for college plan.
These suggestions are intended to be informative. Before taking action on any paying for college plan, consult your own tax, legal, and financial advisors.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.