Today I’m sharing a guest post by Misha Yueng that’s been specifically created with my American readers in mind. If you are from America and your kids and you are wondering how to fund college, this article will give you a great overview of the options available. I hope you find it helpful!
4 ways to fund college and higher education
With the costs of tuition rising, many kids are wondering how they’ll be able to pay for even two years of college, much less four (or more). Because of that, they may assume that higher education is unreachable, when, in fact, there are several options that they can choose to fund their college.
1. Get a Student Loan
The traditional route is still one of the easiest and best ways to fund your college education. Taking out a loan through the government is the easiest way to fund your bachelor’s degree. The downside is that you can’t refinance the interest rate in the future if you needed to.
Another option is using private financing to fund college. Private lenders require you to have an established credit score which for most young people is not an option. This is where having a parent co-sign the loan is so important. It will get you a much better interest rate on the loan which will keep your monthly payments down. Their income levels matched with a government guarantee on the loan means a better interest rate for you since the lender feels you have an even better chance to pay it back. One option that is especially attractive is a Parent PLUS loan. Starting at interest rates of about 8%, Parent PLUS loans are relatively easy to get for people with less than stellar credit and all payments are deferred until the student is out of college. It’s a great option for people looking to pay for school without breaking the bank in the process.
2. Borrow Against Your Retirement
Typically, most financial advisors would advise against touching any part of your retirement package, for the simple fact that compounding interest is your best friend in those situations. Plus, there’s always the downside of having to take a huge penalty for drawing that money early. However, you can draw out a loan against your 401k to help your child pay for school; up to $50,000 is available for you, provided you already have it in your account to begin with. Even though you will be charged an interest rate, you’re essentially lending to yourself instead of a bank, which means it goes right back into your own pocket. Unfortunately, if you lose your job in the five to six years it’ll take to pay it back, they may require you to pay the loan back immediately, so be aware of the risks.
3. Borrow Against Your Roth
The same caveat applies to your Roth as it does for your retirement: if you can avoid it, do. Still, the one advantage to taking out a loan against your Roth account is that you can avoid paying the 10% interest charges that are normally associated with an early withdrawal as long as you use the money to pay for higher education. You’ll still be charged a penalty on the amount that you’ve gained over the period of time, but that shouldn’t nearly be as large as you would have to otherwise.
4. Borrow Against Your Home
A home equity loan can be a great alternative source of short-term revenue, as long as the market value for your house doesn’t drop significantly during the time you’re paying it back. Home equity loans generally come with a fantastic interest rate – anywhere from 4.5-5.5% – and allow you to withdraw up to $100,000 against the value of your home. Keep in mind that you’re essentially putting your house up for collateral with this type of loan, so if something happens, you may lose your house in the process.
If your kids have finished higher education, how did you fund college and did you think it was the right choice for you and your family?