Paying for College Gets Harder

06/29/2009 12:01 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

High school students across America received their coveted college admissions letters months ago, but parents across the country are still trying to figure out how they’ll come up with the money to pay for it. 

College is just too expensive these days for parents to pay for, especially if they have several children. Are you willing to tell your child that you “simply can’t afford” to pay for that elite college he or she worked so hard to attend? Are you willing to suggest a couple of years in a community college, while your kid lives at home? Would that even be a rational solution, since you’ve been counting the days till that know-it-all teenager moves on?

Your child likely received a financial aid offer along with that letter of acceptance—if you filed the dreaded FAFSA application form last winter. (By the way, the Obama administration has proposed shortenening the FAFSA by about two-thirds, from its current 153 question, and making it easier to synch the application form with your income tax return.)  But the aid offer might not be enough to make a dent in the rising cost of college.

According to Reecy Aresty of www.PayLessforCollege.com, you can still appeal the aid award, which typically comes in the form of grants and scholarships that do not have to be repaid, work-study programs, and subsidized (no interest while in school) or unsubsidized Stafford Loans. (Aresty offers a free review of your aid package if you write to him at his Web site, mentioning this column.)

But if you’re a parent who simply can’t say no, you’d better act quickly to find additional money.  Here are your choices:

  • Home equity loan. The interest is tax deductible, but rates could rise sharply. And they’re difficult to get these days, with real estate values falling.
  • PLUS loans for parents. They are not based on need; applications are available through school financial aid office. May be a “direct” loan (7.9% interest) or FFEL Plus loan (8.5% interest), depending on your school. Yearly limit is cost of college, less any financial aid received.
  • Private Loans. Student gets the loan, and the parents co-sign. Rates are higher, may be more difficult to get.
  • Borrow from an IRA. You’ll pay ordinary income taxes but not the 10% penalty for early withdrawals under age 59 1/2.  Withdrawals count as income, and may impact next year’s aid!

One sentence of warning to parents who are considering raiding their retirement funds to pay for their kids’ college: Don’t do it!  At least, don’t do it unless you think the education you’re funding will be put to good use, and that your kids will make enough money—and be willing to share it—to cover your expenses in your old age!

What do you think? Please join the conversation and have your say here.

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