Ways to Pay for College for Your Kids

Although you may still be paying off student loans from your own college education, it’s never too early to consider how your kids are going to afford to go to college. The cost of attending a four-year university is increasing each year at a rate that surpasses inflation, which means that you’ll need a bundle to send your kids to college eventually.

We’re going to take a look at some of the most common ways that parents financially support their children in college and consider which strategies should be at the top of your list. There’s no right answer for what you should do because so much depends on your family’s financial circumstances.

Saving in Advance

Rather than having to take the whole blow of paying for college when your kids reach that age or borrowing and paying it back in the future, it’s usually best to save for college well before you will need the money. Your savings can even grow if you invest them wisely. One of the best ways to save is with a Section 529 college savings plan, which has several federal tax advantages, and also perks with state taxes in some states.

If you don’t choose to go with a Section 529 plan, you should at least save in your name rather than giving money to your kids for them to save in their names. When you go to fill out the Free Application for Federal Student Aid, any money saved in the parents’ names is considered to be less available for paying for college.

Paying From Income

You should expect that a fairly large chunk of what you are earning while your child is in school will go toward tuition and related costs. Prepare for this by getting out of debt as much as possible before your student hits college age, which leaves you more free to use your income for college costs. Your child should also get a summer job each year and use that income to help pay for college.

Student and Parent Loans

The federal government offers several types of education loans that allow you to borrow what you need to fill any remaining gap. Students can get Stafford loans, which have very flexible repayment terms. Parents can use PLUS loans, which allow you to defer payments until the student graduates.

Home Equity Loan

Depending on interest rates, it can actually be cheaper to borrow with a home equity loan than with student and parent loans through the government. But the question remains of whether you’re willing to put your home on the line for the sake of saving a little bit on interest. If home values drop, you could be upside down on your mortgage. Or if you lose your job, you may fall behind on payments and lose your home to foreclosure. It’s really not worth it.

Retirement Plan Withdrawals

This is one of the worst ways to pay for your kids’ education. Not only do you incur penalties if you’re too young to qualify for withdrawals, but you’re breaking into the money you had set aside for your retirement. Your kids have a whole working career ahead of them to pay back student loans, but you don’t have many working years to make up for dipping into your retirement accounts early.

Overall Strategy

Most families end up using a combination of these tactics to pay for college education. In addition, don’t forget about the benefits of attending a low-cost college. Many students can attend community college for two years to fulfill general education requirements and transfer these credits to a more prestigious university to finish out the degree. Getting academic and athletic scholarships also significantly decreases the cost you’ll see.

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1. Reply

   

   Ethan · June 25, 2012 at 9:08 pm

   You have some great advice here Kristen! With the rising cost of higher education, this topic becomes more and more relevant. Of your suggestions above, I certainly recommend either saving ahead of time or trying to pay from current income if at all possible. Although there are a lot of benefits of annuities, withdrawing early is not one of them. Not only with the IRS hit you with a 10% penalty, the insurance company can also penalize you if you pull out more than allowed by the plan. I strongly urge that this be a last resort, but you have laid out several other fantastic options for people to choose from.

   Thank you for sharing.
2. Reply

   

   Brent Pittman · June 28, 2012 at 1:12 pm

   We save the first $2,000 with ESA. Work and scholarships will help alleviate the cost too.