The good news is your child got into college and is preparing to enroll this fall.
The bad news is that you’ve just learned the aid package your child’s school is offering is much smaller than you’d hoped. That means your share of the total cost of college may be larger than what you have at the ready.
The gap for some parents and students can be much worse if you consider top schools in New England, where the annual sticker price before aid is now $90,000 or more.
The total average annual cost came to $60,420 at private four-year colleges in 2023, according to the College Board. After accounting for the average aid offer to offset tuition costs, students and their parents were still on the hook to pay an average of nearly $35,000.
But even when students enroll in less expensive public universities, for any parent who doesn’t have a fat 529 college savings and investment plan, or any at all, it’s sobering to realize that in the next few months you’re going to have to come up with a lot more money than you were expecting.
Exactly how to do that is the question.
“There is no magic bullet,” said Beth Walker, founder of the Center for College Planning Solutions and author of “Never Pay Retail for College.”
But here are some suggestions that may help, or at least buy you a little time to figure out how to handle all the education expenses coming due in the next four years — or longer, if you have younger kids who are also planning to go to college.
If you never wanted your children to be saddled with debt before graduating from college, you might rethink that.
Freshmen can take out a $5,500 federal Stafford loan at a favorable interest rate. Currently it’s 5.50% but it resets every July. Over four years of college, students can take out a total of up to $27,000.
What’s more, they don’t have to pay the money back while they’re in school, and they can get a favorable income-driven repayment plan after graduating.
“It’s their best financing tool available,” Walker said.
If it really pains you to see them assume debt, remember you can plan now to help them pay it off once they’ve graduated, she noted.
Beyond Stafford loans, there are other borrowing options, but they all come with big caveats:
Private student loans: Some students may also take out a private student loan, which doesn’t provide any of the flexible repayment protections they have with federal loans, and could come with a much higher interest rate.
But if your child doesn’t have a credit history, you will need to cosign the loan. So you should think about whether you can assume the risks of repaying that money if your child can’t pay it off, especially if the loan you choose doesn’t allow you to defer payment until your child graduates.
Parental loans: Parents can also take out a federal Direct PLUS loan. But Joseph Bogardus, a certified financial planner who specializes in college cost planning, is not a big fan because of its high fees (over 4% of the loan amount), the fact that there is no real break on the interest rate (currently 8.05%) and parents may have to start repaying it while the student is in school, unless they request a deferment.
As he put it, “If you can’t afford to pay $500 a month now, what makes you think you’ll be able to pay $1,000 a month later?”
Your 401(k): Taking a withdrawal from your retirement savings may be tempting, but it’s never a great idea. No one is going to fund your retirement if you don’t. But if you are thinking of using some retirement money, make sure to first directly roll over the amount from your 401(k) into an IRA. You will have to pay income taxes on the money, but if you’re under 59-1/2 you will not be hit with a 10% early withdrawal penalty in an IRA if you use the money for qualified educational expenses, Bogardus said.
Your credit card: A bad idea. Skip to the next options. The average credit card rate is north of 20%. And if you can’t pay off a large sum right away or you can only make the minimum payments due every month, you risk never getting out of that debt cycle.
Home equity line of credit: If you’re in a real pinch for your child’s freshman year, and you have substantial equity in your home, Walker said, you might consider an interest-only home equity line of credit as a short-term cash-flow option.
“That’s cash-flow friendly while your child is in college,” Walker said. “You’re renting money on the cheap to buy time to figure out how you’ll do this.”
So, say you take out a $20,000 interest-only HELOC at 8%. That means you’ll only have to pay roughly $133 a month in interest, or $1,600 for the year.
You will, however, have to pay the principal back after a given term — typically 10 years. And if you can’t do so in full, you will have to pay interest and principal on the remaining balance until it’s paid off.
Redirect current spending and savings
Even smaller measures can help somewhat in closing the funding gap if you’re looking to raise some cash between now and the fall.
Quantify how much a teenager at home costs: Walker said parents often overlook the expense of having their children under the same roof. She recommends evaluating how much your college-bound student costs you while they are at home. Think food, gas, entertainment, incidentals, etc. That’s money you’ll be able to redirect toward college costs when they leave home.
Redirect discretionary income to savings: During the few months before the bill for the first semester comes due, temporarily cut back on your discretionary spending (e.g., travel and entertainment) and redirect that money into a high-yield savings account.
Temporarily pause or reduce some retirement contributions: It’s not optimal, but if you feel you’re doing okay in terms of your retirement savings, you might temporarily redirect the money from your paycheck that would have gone into your 401(k) or IRA for the next three months and put it into the college kitty instead.
But, Bogardus cautioned, “You don’t want it to be a crutch. Think of the oxygen mask analogy: When doing this, parents should be in a good position first for their own future, then concern themselves with their student’s college costs.”
College is among the biggest financial investments parents and their children will ever make.
Ideally, key questions like “How much can we afford?” should be raised no later than when your child is a sophomore in high school, at which point you can better set expectations of the kind of school you (and they) can afford, Walker said.
So if you find yourself in a bind with your first-born this summer, you can at least be better prepared when your second child starts thinking about college.
You both should take a hard look at different colleges’ costs, Walker suggested, and ask: Is a Bachelor’s degree from a school that costs two to three times as much as another really going to be worth two to three times as much when the child graduates?
Also, Bogardus suggests checking to see if your state offers a tuition aid plan or subsidized loan rates for educational expenses. For instance, he said, see if your state has a program that offers a year or two of free in-state community college, the credits from which can be transferred to the state university from which your child could earn their degree.
