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 The 18-year-old from Ruidoso, New Mexico had already lined up family
savings, financial aid, work study and loans, and then won a $7,500
scholarship from student-loan lender Sallie Mae for making a video
about how he was going to pay for college.
"It feels incredible and very, very relieving," says Gomez, who just
rented an apartment for next August in Denver.
Although 20 percent of families can pay college tuition out of
pocket, according to Sallie Mae, most families have to scramble
every year to put together the cash before the first day of school.
And they cannot really start to do this until they know what the
final price tag will be.
For high school seniors, that means waiting for financial aid offers
that come in March and then having until August to pay the bill.
"My phone is ringing off the hook," says Jodi Okun, president and
founder of College Financial Aid Advisors, a consulting service.
"The panic comes from a lot of families not understanding how
financial aid works."
For those still crafting a college tuition playbook, here are some
tips from the pros:
PAYMENT PLANS
The families calling Okun typically have tuition bills of $20,000 or
more, and none of them can just write a check.
Her top suggestion is to find out fast if the school has a payment
plan, because many require families to sign up in May, rather than
waiting until August.
Otherwise, "it just becomes a line item in the budget," says
financial adviser John Scherer of Trinity Financial Planning in
Middleton, Wisconsin.
Even folks with significant incomes get squeezed. Erika Safran, a
New York-based financial planner who runs her own firm, has clients
who make $250,000 a year and still have a hard time finding the cash
for a $60,000 private-college tuition bill.
"It's not always how much you make, it's also where the funds are
going," Safran says.
SPEND DOWN THE 529s
Safran's clients usually have about $100,000 set aside in college
savings plans, and she encourages them to stretch out the funds so
they can keep accumulating value through investment.
If your state offers tax deductions for 529 contributions, but does
not have a limit on how long the money has to be in the account, you
can put money in at the last minute and then spend it right away,
says Ryan Fuchs, an adviser with Ifrah Financial Services, based in
Little Rock, Arkansas.
If you have more than one child, you can also move funds between 529
accounts as needed. "If it's overfunded for one, you can use it to
fund the other," says Safran.
TAKE THE LOANS
About 30 percent of students take federal student loans, according
to Sallie Mae, while 7 percent take out private loans.
[to top of second column] |
John Scherer and Ryan Fuchs subscribe to the philosophy that
families should take whatever subsidized loans you can in the
student's name, because the interest is low and does not accumulate
until after graduation.
Scherer says that some families use this as a carrot and stick
incentive - if you do well in school, we will pay off your loans; if
you do not, you are on your own.
But Erika Safran counters that there is no free lunch, and that
families will incur origination fees for any borrowing. So if you
have the money, you should pay it up front.
RAIDING OTHER ACCOUNTS
On the list of other assets a family might have, Fuchs says many
people forget that they can withdraw their Roth IRA contributions
(but not the growth) without penalty, as long as the money was there
for at least five years.
While this impedes retirement savings, "it can be a good source of
quick cash," says Fuchs.
Next on Fuch's list of the less-good options is a 401(k) loan, which
typically can be 50 percent, or up to $50,000, from each parent's
account.
This option is not ideal if the parent is in a precarious job, will
retire before the repayment period is over or it would greatly
impede retirement savings.
About 1 percent of families take home equity loans, according to
Sallie Mae. Safran says this is most palatable for those who can
combine it with a refinance.
Okun has only had one client who went so far as to sell her house to
pay for tuition for her daughter to go to a special opera program.
"Her mom said it had to be the best school no matter what," Okun
says.
(Corrects fourth paragraph to show the percentage who pay out of
pocket is 20 percent, not about 25 percent.)
(Editing by Lauren Young and Jonathan Oatis)
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