College has gotten insanely expensive, and trying to figure out the "right" method best for your financial situation can be insanely complicated. So what are your options? In this episode of Money Script Monday, Gabe describes the five ways to pay for college - how to make it affordable, pitfalls to watch out for, and the power of using a college planner.
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Welcome back to another episode of "Money Script Monday." Today, we're going to be talking about the five ways to pay for college.
On my last episode, we talked about the pros of hiring a college planner and the fears of going to college. Now, as I mentioned before, the number one fear is how you're going to pay for it. College is very, very expensive and it was...as I also said before, college is a business. They're there to make money.
Tuition Cost Comparison
So, we need to know the best way to make it affordable and if we look at this graph from 1971 to 2017, tuition has gone up 209%. That's a lot of money. Now, I know this graph is adjusted for inflation but nonetheless, that's still a 209% increase.
Can you imagine going to the supermarket and paying for a gallon of milk and over that same time period, it's gone up 209%? Who could afford that? Or worse yet, can you imagine paying for gas going up 209% for that time period? How could anybody afford to even go to work? It's crazy but that's the world we're living in and paying for college, it's going up astronomical. But the benefits of hiring a college planner is how to make it affordable.
#1 Private Loans
Now, when it's all said and done, there's only five ways to pay for school. The first option is private loans.
(1) Most Popular
This is the most popular option because frankly, anybody can qualify for a private loan. You go to a bank. Most banks don't require collateral to be held down when you have a loan.
(2) Higher Rates
It's crazy to me. I've heard horrible stories of people getting $50,000, $75,000, $100,000 in a private loan. They have an interest rate of maybe 3% to 5%. While in the fine print it will be adjusted, it’s always adjusted and those rates sometimes double.
So, what you thought was a really good rate for a lot of money to pay for school is costing an arm and a leg.
(3) Pay Loan Interest ASAP
One of the things you should be careful with private loans is you have to pay back typically once you start going to school. So, the original amount you took out, you're going to have to use that to pay off the interest on those loans depending on the loans. But that's one of the benefits of hiring a college planner to go over the pros and cons.
#2 Federal Loans
Now the best loan option is number two, federal loans.
These offer the best interest rates available and what's good about it is you don't have to start paying on that loan until after you graduate. That's huge. Typically, it's anywhere from 30 to 90 days but it varies from state-to-state and situation-to-situation.
What you should focus on really is not everybody qualifies. What's really scary about that is even if you need it and you want it, there could be situations that prevent you from getting it.
For example, if your family makes too much income, you have too much assets and so what I'm really saying is if your family does a great job in saving money for college, depending on how they hold that money, might limit the amount of federal grants, aid, and loans you could be granted just because you're doing what you thought was doing the right thing. That's why it's very important to work with a college planner to realize what's the best college holding vehicle so that way you don't get penalized and restricted in future use.
#3 401(K) / Qualified Accounts
Now, let's transition over to number three. We're going to look at four linking qualified accounts, and I know we're going to say, "Gabe, those aren't traditionally the best options", and you're right.
They're very restrictive. You know, you must qualify for it. There's only a certain number of outline items that you can qualify for to get money out.
And what's really scary is there's penalties and if you don't pay it off in time, you could have a lot of problems, a lot of penalties assessed to it and you don't want that. But a lot of times that's the only option available.
If your son or daughter got qualified to go to a top tier school, let's say, Harvard and let's say you need an extra $100,000 and you had $150,000 in a qualified account, it might not be the best option but it's the only option. And, again, working with a qualified college planner, you're going to go over the pros and cons and we're going to determine which option is best for you and your family in your situation.
#4 Cash Flow & Assets
Now, let's look over here, cash flow and assets. This is by far the most popular option.
"I can just work. Gabe, I can just get into a W-2 job and earn an extra $50,000 to $60,000 and pay for the extra tuition." Hypothetically, you could but let's break it down. Everything you do in this world, when you earn money, you must pay taxes on.
If you earn $60,000, you're lucky to really pocket maybe $35,000 or $40,000 and if you need $50,000 or $60,000 to pay for school, that just shows you have to work that much harder just to get that money to pay for school. And here's a double-edged sword to that.
By earning extra money, earning extra W-2 money, that's raising your EFC, therefore, you're going to be less eligible for financial aid, grants, and scholarship and those good loans we talked about.
So, on the flip side, you think you're doing the right thing but it could be hurting more.
Now, what about assets that count. Typically, nonqualified assets like mutual funds, stocks and bonds, those are going to raise your EFC too. One of the things you should worry about is that holding vehicle.
If it's a mutual fund, you could be doing really good over the last couple of years but what happens if you and your students are pulling income to pay for tuition and in year three or four the market takes a crash? And if it goes down 20% to 30%, your money is gone.
It's gone but you might need that to pay the rest of college costs. The schools aren't going to give you an IOU and say, "Don't worry about it. We had a market condition." They need to get paid.
So, you need to have your money protected, you need to make sure that it doesn't raise your EFC but more importantly, you don't lose it. It's there when you need it to pay for college tuition and fees. That's why it's so crucial to work with a college planner to figure out what the best options are.
#5 Home Equity
Now, lastly number five is home equity. Now, a lot of times people say, "Well Gabe, I don't want to pull a home equity out. I don't want to increase my fees and, you know, I'm close to paying off my home loan." And I know that's the number one dream in America is they have no mortgage payment but sometimes, having a mortgage payment is not the worst thing in the world.
Let's be honest. It's one of the few things we have out there that is a good tax write-off. So, it's considered a good debt to have, and with today's low-interest rate environment, you could maybe refinance, get 3% to 4% fixed, and you're okay. And it's a good tax write-off to have.
What you must be careful on is one, make sure that the loan provisions are good. You don't want to get sold into a loan that has an adjustable-rate, ARM, and that you think you're paying 3% to 5%. But then after the fourth or fifth year, it jumps up to 8% or 9% then it could be very well not affordable. And lastly, you should make sure that the college plan, the holding account you want to put it into will allow home equity.
Home equity does have a lot of restrictions out there so just work with your college planner to make sure that the college vehicle they're using is going to be allowed home equity. And again, that's one of the benefits of working with a college planner.
Now, as I said before, there are only five ways to pay for school. All five of them are great, right? Nobody wants to pay for anything but what we should focus on is which option is best for you and which option is less painful.
More importantly, every family is different. You might be working with private loans, with a combination of cash flow and assets. Maybe you're blessed, and you have everything in federal loans and grants. Maybe it's a combination of home equity and cash loan; everybody is different.
There's not one cookie cutter way for every family out there. That's the benefits of working with a college planner, to work with your situation to figure out what's best. And more importantly, a qualified college planner is going to work on lowering your EFC so you can possibly get school for free or get the best federal loans available so you can make it as affordable as possible.
Again, thank you for attending today's episode of "Money Script Monday." And we reviewed the five ways to pay for school but more importantly, the benefits of hiring a college planner to make school more affordable. Thank you.