The stock market’s downturn has translated into a college funding shortfall for the parents of soon-to-be college students. If you’re facing a whopping college tuition bill, you probably don’t have time to wait for the market to rebound. Here are five alternative ways to raise cash for those tuition payments.
1. Home equity: Home equity has been a popular source for college borrowing, thanks to tax deductible interest and favorable rates. But given the credit crunch and falling housing prices, not everyone has home equity left and some banks are stingy about lending, says Amy Noel, a Boulder, Colorado-based certified financial planner.
"Explore the options, though, and it may change as liquidity starts moving again,’’ Noel says.
If you have a home equity line of credit, consider tapping it now and putting those funds in a safe, interest-bearing account reserved for college payments. If you don’t yet have a home equity line, see about setting one up.
2.College loans: Try government loans, which have more favorable terms than private loans.
Post-downturn, families that didn’t qualify for certain loans or other aid may now be eligible, says Cindy Conger, certified financial planner and certified public accountant in Little Rock, Arkansas.
Parents can take PLUS loans. Federal PLUS loans have a fixed interest rate of 7.9%, while bank PLUS loans have a fixed rate of 8.5%. Sixty days after the funds are taken, repayment begins, with terms as long as 10 years.
Students can take Stafford loans, which come to two varieties: subsidized and unsubsidized. The government pays the interest on subsidized loans while the student is in school, while for unsubsidized loans, the student is responsible for the interest. (Payments can be deferred until graduation.)
If parents have taken PLUS loans, the student can borrow: $5,500 for freshmen, $6,500 for sophomores, and $7,500 for juniors and seniors. Students whose parents did not take a PLUS loan can borrow even more.
3. 401(k) loans: Many employer-sponsored plans allow participants to borrow from their accounts and the interest payments go back into the account rather than to a bank.
But this is a risky option.
If you lose your job – an unfortunate reality for many in this climate – your plan would probably require immediate payback of the loan. If you can’t pay it back, the loan becomes an early withdrawal with a 10% penalty and taxes if you’re under 59 ½.
Another negative: if you pull money out now, after you’ve suffered losses, you’ll miss any chance to benefit from market bounce-backs.
Noel says you can also take money out of a Roth IRA (the original contributions, not interest or rollovers) to pay for college, but like a 401(k) loan, your nest egg will suffer.
4. Ask Grandma: If you or your children expect to see an inheritance from an older relative years down the road, consider asking for funds today. Grandma may love to see her hard-saved money put to good use while she’s still around to enjoy the results.
But don’t be shocked if grandparents say no, Conger says, and don’t have an expectation that they “should” help. Many seniors are afraid of outliving their money.
5. Change beneficiaries on 529 accounts: 529s allow certain changes in beneficiary designations without taxes or penalty, so you’re in luck if you have more than one child and several 529 plans.
Rather than sell losing investments in your older child’s account, change that account’s beneficiary to younger children so there’s more recovery time, and fund current college bills another way.
"The younger a child is, the more equities there will be in a 529 Plan, so the youngest child’s 529 Plan may be the one that has gone down in value the most,’’ Conger says.