Can I afford to send my child to a private college anymore?

Ask an Advisor is a series in which people receive complimentary, personalized feedback from a Citizens Wealth Advisor. The following financial advice is for informational purposes only and doesn’t take into account personal or financial information not submitted to the Financial Advisor.

Irene, from Ohio, writes:

I’m a strong believer in education as a pathway to success. My son, Michael, is an A student and I want to reward his hard work by paying his tuition. He has his mind set on a couple of private colleges with strong academic reputations. I thought it was doable, but a series of unexpected expenses got me thinking of alternatives, particularly considering I have two younger children (11 and 8 years old) who I also want to help in the future. I also don’t want Michael to acquire debt. I know too many professionals in their 30s still paying their student loans.

Can I afford paying Michael’s full tuition without jeopardizing my retirement or my other kids’ pursuit of a higher education? I’m divorced and my ex-husband can barely afford alimony.

Kudos on your desire to help your son, Irene. Your financial snapshot reveals you may be able to pay Michael’s college tuition, but it will require some flexibility on your part — and his.

The main piece of information you need is how much you’ll have to pay. According to the College Board, the average cost of tuition and fees at a four-year private college is $36,880 (2019-2020 academic year). It doesn’t end there. The average cost of room and board is $12,680, which brings the total to $49,560 per year. Multiply that by four and you’re looking at least $198,240, not considering textbooks, supplies or incidentals.

There are intangibles that could justify such investment (specialized programs, job recruitment advantages), but if your son doesn’t have a specific career path in mind or is aiming for a major that’s offered universally, a more affordable alternative could be in the cards. Consider the average tuition and fees for an out-of-state public college ($26,820) and an in-state public college ($10,440), both considerably more affordable. There are online tools that can help you and Michael determine the true cost of college, including his top picks, based on your financial situation.

At 46, Irene, you’re in OK shape for retirement: Not counting your home, you’ve accumulated $560,000 in assets, nearly five times your salary. A common rule of thumb among financial advisors is that, by age 40, you should have saved three times your salary for retirement. By age 50, it should be six times.

However, if you plan to help your son with college expenses, that may exhaust your savings. Don’t touch your 401(k). That’s the cornerstone of your retirement plan, not to mention, it’s taxable.

Your first stop to pay for your child’s education should be a 529 plan. A 529 plan is a college savings account that offers tax and financial aid benefits. Earnings accumulate on a tax-deferred basis and distributions are not taxed federally, if used for higher education expenses.

Since you don’t mention having a 529 plan, proceed with your low-interest savings account. With $54,000, you could take care of a year of private college, two years of out-of-state public college and near the entirety of in-state university. You should only dip into your brokerage account after your savings account is depleted.

The good news is that given your younger kids’ ages, you are on time to start a 529 plan for them, particularly considering college expenses are likely to increase over the next decade. Other options are qualified tuition plans (buy tuition at today’s prices to use in the future), education savings accounts (beware of limits to contributions), U.S. Treasury savings bonds (lower interest, but guaranteed by the federal government) or custodial accounts (assets hold in custody until the beneficiary becomes of age). But 529 plans are more widely favored.

If you can’t fully cover Michael’s college expenses, he may qualify for federal direct loans. Whether these loans are subsidized or unsubsidized depends on your financial situation, but rates can be lower and the terms may be more generous than other student loan options. Beware, there are borrowing limits for both subsidized and unsubsidized loans ($3,500 and $2,000, respectively, for first-year undergrads, with higher limits in subsequent years). This is your best option if you’re close to covering the full amount and want Michael to borrow conservatively.

The Federal Direct PLUS Loan is a loan for parents or graduate students, with no origination fees (depending on the lender). This loan generally has a higher interest rate and fees (5.30% between July 2020 and July 2021), but you can borrow as much as you need to cover a gap in funding. Based on your financial snapshot, you shouldn’t have problems being approved (individuals with adverse credit history may). Unfortunately, it comes with an origination fee (4.23% for the 2020-21 school year) and you’d have to start repaying the moment the funds are disbursed.

An alternative option to compare is private loans which offer flexible terms and a variety of rates and repayment options including deferment. There are loans for students (typically with a qualified co-signer) or parent options as a sole borrower. Having said that, because of your good credit, you may be able to get a lower rate than with Federal Direct PLUS Loans, and avoid origination fees (depending on the lender). If you go with a private loan, be sure to compare rates and benefits as well as potential tax advantages. Some even offer peace of mind with multi-year student loans with one application.

Granted, this is last resort territory, but you may discover a home equity loan or line of credit may be an option. Both leverage the collateral in your home to access funds but there are distinct differences. You may find a home equity loan at a fixed rate, however, you will need to borrow the full expected cost of education up front. A home equity line of credit can offer the flexibility to only borrower funds as needed and is typically only available as a variable rate.

Since the value of your house is $450,000, and the outstanding amount on the original loan is $150,000, you could receive up to $300,000 in a home equity loan (minus fees). Then again, you could end up paying the equivalent of a second mortgage and your house ends up on the line. Since this would be your sole responsibility, consider this option very carefully.

Paying for a private college is not an all-or-nothing situation. Even if you only pay half of your son’s tuition, you’ll be reducing his student debt, a burden all too common among young graduates.

Often private colleges provide grants and bursaries (non-repayable awards based on financial need). Based on his grades, your son would have a shot at partial scholarships that could get you closer to fully cover the cost of his tuition. In addition, he should exhaust any and all non-merit based scholarships available through community organizations and businesses.

Parents who use their own income and savings to pay for their kids’ college, on average cover 23% of the cost. Scholarships take care of around 35% of the tab, and loans cover approximately 27% of the cost.

With a net worth of $454,000 (not counting your 401(k)) in your mid-to-late 40s, you’re in a far better situation compared to most American households, according to the 2019 Survey of Consumer Finances. The average net worth by family in the US in 2020 is $121,411.

Your future can benefit from a little teamwork. Meet with a Citizens Wealth Advisor today.

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