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With my son recently getting a 32 on his ACT and maintaining a 4.0 GPA it is starting to look like I may have to fulfill my promise to pay for the best school he can possibly get into.
Even if he gets some great scholarship money, I figure to be on the hook for at least half. We have a 529 plan which should cover about $40K. And some I-Bonds purchased in 2001 that are tax free if used for education. But, I'd rather keep them for retirement if I have the option.
Here are the questions:
1. What are the best loan options available?
2. Should the loans come first or wait until the last couple years?
3. Are we better off using our home equity line of credit (4% tax deductible - 100% equity on the house)) versus taking out student loans?
Overall, what is the best strategy for someone who is unlikely to get any "need based" assistance? Loans? Payment plans? Burn assets first and then take loans or vice versa?
Or should I just give him $200K and turn him loose in the world? < I am only half kidding on that one!
the first question is ,do you have your retirement fully funded?
time and time again parents try to pay for college while they are dropping the ball on their own retirement.
there are hundreds of ways kids can get loans for school and have a lifetime to pay for them. there is not one loan you can get to fund your retirement short of pre-selling your house with a reverse mortgage. thats not the answer either as the amount you get can be quite puny after fees ,insurance and formulas.
its nice to pay for school but to many parents end up being burdeons later on to their kids.
I knew that would be the first question. I almost addressed it in my initial query, but did not want to clutter my post.
I am pretty sure of my retirement plans. I fund my 401K to the full pre-tax amount. Plus, we have a 6 figure IRA. The house is paid off. No debt and I have a fully vested pension. With almost 15 years until age 65, even the most pessimistic calculators say I will far exceed my goals.
I intend to pass on at least some of the loan debt to him as a way of keeping him invested in his own education. But, I don't mind underwriting the loan if it is to our best advantage. Plus, if his hard work and dedication earn him a sizable scholarship that will be a huge contribution on his part. I should add that he has been working since he was 13 and currently has 3 sources of income, soon possibly a fourth. He has never asked for an allowance.
I am mostly interested in looking at the pros and cons of various ways of filling the gap. At this point I am thinking the HELOC will be the most cost effective, but if rates rise it will go up too. At which point a fixed rate might become advantageous. Then again, a loan that defers interest accrual until graduation would be attractive, if available.
Last edited by shaker281; 04-29-2011 at 03:27 AM..
With my son recently getting a 32 on his ACT and maintaining a 4.0 GPA it is starting to look like I may have to fulfill my promise to pay for the best school he can possibly get into.
Even if he gets some great scholarship money, I figure to be on the hook for at least half. We have a 529 plan which should cover about $40K. And some I-Bonds purchased in 2001 that are tax free if used for education. But, I'd rather keep them for retirement if I have the option.
Here are the questions:
1. What are the best loan options available?
2. Should the loans come first or wait until the last couple years?
3. Are we better off using our home equity line of credit (4% tax deductible - 100% equity on the house)) versus taking out student loans?
Overall, what is the best strategy for someone who is unlikely to get any "need based" assistance? Loans? Payment plans? Burn assets first and then take loans or vice versa?
Or should I just give him $200K and turn him loose in the world? < I am only half kidding on that one!
my parents took out PLUS loan for my sister, but then the rest were regulat student loans in my sister's name. the loans in my sister's name, with my parents cosigning were structured in a much cheaper way than the PLUS loans. also, PLUS loans you need to start paying back immediately, while a student loan could be deferred until 6 months after graduation.
make sure you fill out the FAFSA. also, you might want to talk to a financial advisor, or read up on Kiplinger's or Money Magazine's websites to see, as they've talked about this before.
home equity is an interesting strategy, but also remember that if you meet income qualifications, student loan interest is deductible to a certain point.
i won't lecture on your finances, but don't sacrafice your retirement savings for paying for college. do the best you can, but you can't take loans out for retirement, while your son can take loans out for college. he sounds bright, so he should be successful. just guide him on the right career path. my parents sent me to private school 1-12, so college would be nice if they paid, but they could not. loans aren't horrible, and you can always help make those payments.
but explore every avenue of getting need-based and academic-based scholarships.
I knew that would be the first question. I almost addressed it in my initial query, but did not want to clutter my post.
I am pretty sure of my retirement plans. I fund my 401K to the full pre-tax amount. Plus, we have a 6 figure IRA. The house is paid off. No debt and I have a fully vested pension. With almost 15 years until age 65, even the most pessimistic calculators say I will far exceed my goals.
I intend to pass on at least some of the loan debt to him as a way of keeping him invested in his own education. But, I don't mind underwriting the loan if it is to our best advantage. Plus, if his hard work and dedication earn him a sizable scholarship that will be a huge contribution on his part. I should add that he has been working since he was 13 and currently has 3 sources of income, soon possibly a fourth. He has never asked for an allowance.
I am mostly interested in looking at the pros and cons of various ways of filling the gap. At this point I am thinking the HELOC will be the most cost effective, but if rates rise it will go up too. At which point a fixed rate might become advantageous. Then again, a loan that defers interest accrual until graduation would be attractive, if available.
ok you answered the retirement issues, which i didn't read this far ahead.
i think generally speaking, federal loans, whether subsidized or unsubsidized, are the cheapest. so he should get those to cover as much as they do (i think it's around $5,000/yr). then private student loans, PLUS loans for parents, or home equity for the rest.
like i said....Kiplinger's and Money have articles on this all the time. so check out their webistes.
I dislike the idea of using home equity loan for this purpose. Fundamentally it is the parents that have "built up" the equity and it strikes me as something that comes awfully close to a "gift" even if the kid is responsible and pays it back...
Financial aid is funny thing and what your kid might qualify for could shock the heck out of you. Makes sense to start there. Now if five - ten years down the road you do feel like gifting the kid (and their spouse..) money to help pay off any remaining loans and make a down payment on a house of something that is a whole other ball of wax, but the basic idea is that living with the monkey on their back of student loans for a while ought to help them understand how finances work...
When you EXPLICTLY borrow money on your credit to help anyone that is technically capable of "helping themselves" you implicitly make them not just dependent upon you, but unaware of the "risk" you've assumed on their behalf. Even though the kid sounds industrious and responsible, seems like a good idea to let 'em prove that with loans in their own name.
I am pretty sure of my retirement plans. I fund my 401K to the full pre-tax amount. Plus, we have a 6 figure IRA.
Anyone who can fund their 401k to the full pre-tax amount ($49k/year for an individual and $98k/year for a couple, is fully prepared to fund their children's colleges.
That's bad advice for someone as competent as the OPs son. A private top tier school is a better location for him. The OP wants to OPEN doors for his/her son, not limit him.
That's bad advice for someone as competent as the OPs son. A private top tier school is a better location for him. The OP wants to OPEN doors for his/her son, not limit him.
If he is that good, a degree in any state university will admit him to the graduate school of his merit. Why pay an extra $100K or so to get him just through his bachelors degree?
The best and the brightest don't necessarily choose to excel in highly remunerative fields. So you may be limiting his career choices if you force him to repay a huge debt in his future.
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