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The cost of going to college can be steep — and 43% of that cost is typically covered by family income and savings, according to Sallie Mae. This makes parents paying for college the biggest source of college funds for many students.
The average college degree costs anywhere from $25,890 as an in-state public school student up to $52,500 at a private nonprofit college annually. This means parents can spend quite a bit on their child’s education.
Here are four ways to help your student with college expenses:
- Set up a savings account early on
- Help your student fill out the FAFSA
- Take out a parent loan
- Cosign a student loan with your child
1. Set up a savings account early on
You can start saving for your child’s college education at any time. The earlier you start saving, the better — but it’s never too late to start putting money away.
Here are two types of accounts that can help you save for your child’s future college education:
- Bank or credit union savings account: With a regular savings account, you can earn interest on your money. Plus, bank savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC), and credit union savings accounts are insured by the National Credit Union Administration (NCUA) — so you know your savings are safe. Look for a high-yield savings account to get the best interest rates.
- 529 college savings plan: These plans work a lot like retirement investment accounts, but they’re used only to save for education expenses. Each state sponsors its own 529 plan, though some states also allow out-of-state applicants. These savings plans offer some big tax benefits so long as you use the funds for qualified education expenses.
2. Help your student fill out the FAFSA
Submitting the Free Application for Federal Student Aid (FAFSA) is a critical step when it comes to getting federal student aid. While the student should fill out the FAFSA themselves, keep in mind that dependent students will need information from their parents to finish it. In this case, you as a parent can help make the process faster and easier.
The FAFSA can open the door to college grants, which is money for school that you don’t have to pay back. It’s also how students qualify for federals student loans, which typically come with lower interest rates than private student loans. It’s worth submitting the FAFSA even if you think your student doesn’t qualify for federal aid since they might be eligible for aid you don’t know about.
Learn More: Student Loan Requirements
3. Take out a parent loan
There are several options for parents to borrow money to pay for their child’s education, including Parent PLUS Loans and private student loans for parents. The best one for your situation generally depends on your credit history.
Here’s what to consider when looking at Parent PLUS Loans vs. private student loans:
- Parent PLUS Loans: These are federal student loans for parents. Interest rates for loans taken out between July 1, 2019, and July 1, 2020, are 7.08% — this is one of the highest rates for federal student loans. PLUS loans also come with a 4.236% origination fee for loans first disbursed through Oct. 1, 2020. Parent PLUS Loans come with some valuable benefits, but when you factor in the fees, they can be very expensive.
- Private student loans for parents: Qualifying for private student loans is different than with PLUS loans. But if you have good to excellent credit, you might find a lower interest rate with a private lender. If you’re considering private student loans, be sure to check your rates with multiple lenders to find the right loan for you. You can do this easily with Credible — and you can see your rates in two minutes.
4. Cosign a student loan with your child
If your child has exhausted their federal student loan options, private student loans could be your next step. Remember that most private student loans require a cosigner, though. If you have good credit, cosigning a student loan with your child could be another way to help them pay for college.
Cosigning a student loan lets your child benefit from your good credit. But it can also put your credit on the line if payments are late and make you responsible to pay back the loan if your child doesn’t.
Learn More: How to Get a Student Loan Without a Cosigner
Tip: Think twice before withdrawing from retirement funds or taking out a HELOC
If you’ve been studiously stashing away funds in a 401(k), IRA, or other retirement savings account, think twice before tapping into those funds to help your child pay for college.
Withdrawing early leads to taxes and penalties, which can easily eat up a big chunk of what you take out. Plus, you’re taking from your retirement fund — and you can’t take care of others if you’re unable to take care of yourself.
There are also risks to using a secured loan tied to your home, like a second mortgage or Home Equity Line of Credit (HELOC), to pay for your child’s education costs. If you miss payments on this type of loan, you could lose your house!
Helping your student with college tuition starts with smart financial choices
Paying for college is a long-term process that starts with smart financial decisions. From saving early to managing your credit well, there’s a lot you can do as a parent to help your child pay for college.
However, your family decides to cover the cost of college, take the time to teach your kids about student loans and the realities of making monthly payments for a decade or longer. This way, your child won’t end up saddled with loans they can’t pay back.
If you decide that a private student loan is a good move, remember to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare multiple lenders, all without affecting your credit score.