How to Pay for Your Kid’s College: What Parents Need to Know

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Having your child get accepted into college is likely one of your proudest moments as a parent. But with tuition and fees for a four-year private institution costing an average of $32,410, figuring out how to pay for a kid’s college education is likely also one of the most stressful experiences.

Luckily, there are many ways parents can help fund their children’s education that don’t include draining your savings. Here’s what you need to know:

5 student loan options for parents Parents’ legal obligations Final thoughts on paying for your child’s college 5 student loan options for parents paying for college

While students can take on a lot of the responsibility when it comes to paying for college (i.e., applying for scholarships), parents can provide financial support in a number of ways.

1. Take out federal loans 2. Consider private loans 3. Set up a 529 Plan 4. Use your retirement savings 5. Use equity from your home

1. Take out federal loans

The first step for any prospective college student should be to fill out the Free Application for Federal Student Aid (FAFSA). This will determine how much aid your child will get in a variety of forms, including grants and federal loans.

But if your child is considered a dependent, you will be responsible for completing a portion of the FAFSA form – you will need to provide your income, assets and other financial information. This will open up the possibility of a Parent PLUS Loan, although that doesn’t mean you are obligated to take out a Parent PLUS Loan, just that it’s an option.

A credit check is completed for this type of loan, so you can’t have an adverse credit history. You can borrow up to the total cost of tuition, minus any other financial aid, and will always have a fixed interest rate (5.30% for the 2020 to 2021 academic year) since the loan is issued by the government.

Unlike other federal loans, Parent PLUS Loans are provided in the parent’s name, and it’s your responsibility to pay it back as soon as it’s fully disbursed.

How to get a federal loan

Your child can go ahead and do the work of filling out the FAFSA, and you can input your information. Once that is done, you can sign in to StudentLoans.gov to request a PLUS loan and then follow the instructions, which will depend on the school. Then, if you are eligible, you will have to sign a Master Promissory Note agreeing to the loan terms.

2. Consider private loans

Even if your child has scored some scholarships and taken out loans in their own name, and you’ve borrowed federal loans, it still might not be enough to cover the total cost of education. That’s when you might look into private student loans for paying for college.

Whether the loan is in your name or your child’s (see below), you will almost certainly need to provide some financial documents when you apply. While each lender will require different information, it’s best to have the following ready before applying:

Social Security number Personal information, such as telephone numbers, date of birth and home address Gross annual income A list of any assets and their values Monthly rent or mortgage A copy of your latest tax return Employment information, including a recent pay stub (within the last 60 days)

There are two ways you can get private student loans:

Take out the loan yourself

This means you will apply for student loans for parents, which will not be in your child’s name at all. Interest rates, eligibility and the repayment terms will all be determined by the lender since it is not a government-issued loan.

Cosign your child’s loan

When it comes to statistics on parents paying for college, about 92% of private student loans were cosigned, according to available data from MeasureOne. With this option, technically your child is the borrower, so they are responsible for paying back the loan. But if they have trouble paying, the burden will then fall on you.

Even as a cosigner, your credit score, and other financial information will be taken into consideration. Again, interest rates, eligibility and the repayment terms will all be determined by the lender.

The good news with private loans is that you can generally borrow much more than is allowed with federal loans, and there’s no deadline for when you need to apply. Unfortunately, interest rates can be higher, and you might have to start paying while your child is still in school.

3. Set up a 529 Plan

One of the popular ways parents are paying for college tuition is by starting early with a 529 College Savings Plan. Through this savings plan, you can contribute more than a traditional savings plan and take out the money to pay for college-related expenses without any penalty or tax.

With the money invested, you can choose between stock, bond, mutual or money market funds, and even choose a portfolio based on the age of your child. It’s best to invest as early as possible.

If you started investing $100 a month when your child was born, with an expected annual return of $5.7%, you would have close to $38,000 by the time they were 18. That’s thousands more than a traditional savings account.

It’s important to remember, though, that every state, plus the District of Columbia, offers a version of the plan, and the exact rules and benefits do vary.

How to start a 529 savings plan

Starting as soon as possible, look up your state’s 529 plan or compare plans at SavingForCollege.com. You can also reach out to your financial advisor to set it up for you.

All you’ll need is your personal information, such as Social Security number and date of birth, available, as well as a transfer from your checking account. Some states might have a minimum. Then just set up an automatic contribution each month to ensure you’re funding the account.

4. Use your retirement savings

The options above are often the wisest choices, but you do have a couple other choices — using retirement savings or home equity. While not ideal, this approach might be worth considering in some cases.

If you have some wiggle room with your retirement accounts and aren’t worried about your future finances, you could tap into your retirement account to help pay for college. This option is only available to parents under the age of 59½ with an IRA account. You will not face early withdrawal penalties but might have to pay taxes on the amount depending on whether you have a traditional or Roth IRA.

This option isn’t available with a 401(k), but you might be able to get a 401(k) loan. Check with your retirement accounts for your options and what it would cost you to do this.

How to use your retirement to pay for college

Choosing this option when paying for college will depend on what retirement account you have set up and its limitations for early withdrawal. It’s helpful to reach out to the institution managing your retirement account to find out exactly how to request a withdrawal to pay for your child’s college education.

Your human resources advisor might also be able to guide you on the process if your account was set up by your employer.

However, when planning for your child’s future, make sure not to endanger your own. There are many ways for your child to pay for their degree. Withdrawing from your retirement account could leave you short on cash when you want or need to retire.

5. Use equity from your home

If you own your home, you may be able to tap into its equity to help your children pay for college. Note that this can be a risky proposition, so be sure to read the caveats below. That said, here are three potential ways to access cash out of your house.

Use a home equity line of credit (HELOC) Take out a home equity loan Cash-out refinance Home equity line of credit

A home equity line of credit (HELOC) uses your home’s value as a revolving credit line. Usually you can take out approximately 80% to 90% of the equity in your home. You can borrow on an “as needed” basis during the withdrawal period. The repayment period is when you’ll have to pay back what you owe, plus interest.

Home equity loan

A home equity loan (essentially a second mortgage) uses the equity in your house as collateral for the loan. Unlike HELOCs, home equity loan interest rates are fixed and you are given a set amount to pay back each month, like a regular mortgage. How much can you take out? Most lenders will allow approximately 80% to 85% of your home’s appraised value, minus what you owe on your remaining mortgage, plus fees and closing costs.

Cash-out refinance

To pull cash out of your mortgage, you will need to refinance it for a larger one. Any amount over the mortgage needed to cover your house can be taken out as cash. Then, you are responsible for paying off the new mortgage.

The risks of using home equity or retirement funds

There are pros and cons for using home equity to finance your children’s education. For example, home equity can make it possible to borrow large sums to cover college tuition. But like using your retirement funds, using home equity has some very serious risks, including foreclosure. If you can’t repay your loan or line of credit, the lender could seize your home and you could ruin your credit.

If your children use federal loans to pay for their education, they will have access to payment plans, deferment options and be given a longer amount of time to pay back the loan. Home equity loans do not provide these cushions.

Are parents legally obligated to pay for college?

The short answer to this question is no. Your child can find many ways to finance their education through scholarships, federal loans, grants and more.

On the other hand, you are legally on the hook in a few scenarios:

1. If you take out a Parent PLUS Loan 2. If you take out a private student loan in your name 3. If you cosign a loan 4. If you’re divorced

1. If you take out a Parent PLUS Loan

This federal loan is entirely in your name and cannot be transferred to your child unless you refinance with a private lender. That means you are responsible for all payments.

2. If you take out a private student loan in your name

Like Parent PLUS federal loans, any private student loan that you take out is your responsibility, as it is in your name.

3. If you cosign a loan

Although your child is technically the primary borrower, you would be legally obliged to repay the loan if your child is unable to.

4. If you’re divorced

While this varies by state, if you’re divorced you might have to pay for your child’s tuition. This typically happens when one spouse is required to make child support payments, and a court determines they are also responsible for helping to pay for college tuition. Consult your lawyer if you’re paying child support to determine whether you’re legally obligated for your child’s college costs.

Final thoughts on paying for your child’s college

There are a lot of choices out there for parents paying for college tuition, and this can be overwhelming. It’s best to start the discussion of financing your child’s education early, so everyone knows what they’ll be responsible for in the process.

Rebecca Safier and Maya Dollarhide contributed to this report.

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