How To Fund College
7 Steps To Consider
Before Borrowing
When college costs exceed what you’ve saved, where should the additional money come from? Rather than reaching immediately for loans, consider working through potential funding sources in order – starting with money that doesn’t need to be repaid and reserving higher-risk options for later.
Here’s a seven-step funding hierarchy to help you evaluate your options while keeping other long-term financial goals in mind.
1. Start with free money
Maximize grants and scholarships and file the FAFSA form, even if you’re late. If your financial circumstances have changed, consider appealing your financial aid award.
2. Look at current
cash flow
Consider whether discretionary spending can be redirected toward education during enrollment years. Students may also contribute through work-study programs or part-time employment.
3. Consider excess liquid assets
Look first to cash beyond your household’s emergency reserve and operating needs, followed by taxable brokerage assets while considering potential capital gains and holding periods.
4. Explore family support
Grandparents and other relatives may be able to help. Under updated FAFSA rules, distributions from non-parent-owned 529 plans no longer count as student income.
5. Use student loans before parent loans
If borrowing is necessary, consider subsidized federal student loans first, followed by unsubsidized loans. Exhaust federal options before considering private student loans.
6. Approach parent borrowing carefully
After student federal loan options are exhausted, evaluate parent borrowing against your retirement plan. Consider how repayment could affect retirement savings and your planned retirement date.
7. Reserve home equity for last
A home equity loan or HELOC should generally be considered only as a last resort after evaluating its potential impact on your retirement and broader financial plan.
Two funding sources to avoid
Retirement savings: Avoid using retirement-account withdrawals or 401k loans to cover education costs. There are borrowing options for education, but not for retirement.
Private loans too soon: Consider maximizing federal student loan options before turning to private loans, which generally do not provide the same statutory borrower protections.
When education savings fall short, the right funding approach should consider both today’s college costs and tomorrow’s financial goals. A financial advisor can help you evaluate the tradeoffs and determine how education funding fits within your broader financial plan.
Connect with Edelman Financial Engines and and learn how our financial advisors can assist you with your education funding needs.