Paying for College ... the Smart Way

Thursday, May 02 at 10:10 AM
Category: Personal Finance

The cost of college has risen faster than the general inflation rate for many years. So, it's no surprise many parents borrow to pay for higher education and many college graduates owe tens of thousands of dollars on student loans and related debt. Here are some strategies for keeping college financing costs down.

Make saving, not borrowing, your first choice for paying for college. Starting a college savings account, such as a state-sponsored "529 Plan," allows families to maximize growth in a tax-advantaged account and reap the benefits of compounding small amounts of money into a large sum when the child graduates from high school. Investment advisers also recommend setting up an automatic investment plan through your bank account or paycheck to encourage systematic savings.

Take the time to research your options for a loan. If you think you need a loan, do your homework and ask lots of questions before settling on one. Among the many options are federal government loan programs, including "PLUS" loans for parents and Perkins and Stafford loans for students (usually with fixed interest rates and some form of deferment on repayment until after graduation). Also available are personal loans from private financial institutions and state government agencies.

Of course, you'll want to know whether a loan is fixed or variable rate and what could trigger a rate increase. But student loans may have unusual features to consider. In particular, ask about any options for delaying payment until after graduation and any policies on "forbearance" (temporarily reducing or postponing payments from a borrower in financial distress). Also find out about any rebates for on-time payments and other incentives for good performance.

Your state's department of education, the college's financial aid department and an Arvest advisor may be good resources.

Think twice before borrowing against your home or retirement accounts.
Parents who do not qualify for a tax deduction on loans for higher education may want to consider using a home equity loan if they qualify for a tax break on the interest. But remember, a home loan puts your house at risk. Another option is to borrow from your retirement savings, but most investment advisers recommend against that approach because it may reduce your future earnings and make it tougher for you to retire when you want.

Shop for a good price on a college, not just on the college financing. When looking at college costs there’s more than just tuition to consider. Look at the cost of living including housing, food and other expenses. Consider two-year community colleges and schools close to home, which can help save on housing and food expenses.

Youth is no excuse for defaulting on a loan. At some point, perhaps after graduation, the loan payments will begin. How a young person manages student debt can be crucial.

"Other loans, such as credit cards, and high living expenses can make it tough for a student or graduate to pay off college loans," cautioned Kirk Daniels, a supervisor in the FDIC's consumer affairs section. "The non-payment of a student loan is a bad way to start your career because your credit report will be damaged and the ability to obtain new credit or even qualify for certain jobs may be jeopardized."

But what if your good intentions fail and you have no way of making a payment? Contact the lender immediately. "Many lenders would rather work out some modified payment plan than have the borrower stop making payments completely," Daniels said.

Tags: Budgeting, Cash Management, Debt, Financial Education, Lending and Financing
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