Why Co-signing a Loan is the Best Way to Help Your Kids Borrow for College

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I know, you love your child and want the best college for them.  They worked so hard but are a little – or a lot – short of affording their dream school.  Don’t fall into the parent trap of borrowing heavily for college at the expense of your retirement.  You can help them without hurting yourself.  Here’s how to find the middle ground.

Start by framing the discussion like this: college loans should be the last resort, not the first option.  First, look to savings to reduce future debt.  Even if you start late in high school, it’s ok because bills will continue to arrive four or more years down the road. Saving a dollar today beats borrowing one tomorrow. Here’s an article on college affordability and a podcast.

Next, look for free money: gifts from relatives, grants and scholarships that do not have to be repaid.  Here’s an overview of need vs. merit based aid, and a drill-down on grants.

Finally, determine if you or the student can contribute earnings while the student is in-school racking up those bills.   When savings plus free money plus current income exceeds the cost, no loans are necessary.   Be sure to account for all four (or more) years the student will be a college student, if there is a gap between expected cost and available resources, then it’s time to consider loans.  For most students, the Federal Loan program is by far the best option when you consider the interest rate and repayment terms.  One problem: the amount that can be borrowed is capped.

Let’s assume that the student takes a government loan but a gap still remains between the cost of college and the sources of money. Now all eyes turn to you (or perhaps grandparents or other relatives) for help.

The BEST ADVICE:

  • Co-sign a loan and make sure it has a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once your child establishes their own good credit.   With this type of college borrowing, you effectively lend your established credit profile to your child so they can be approved for a loan at a time they would not qualify on their own.   Once a good repayment record on the loan is established, the student should contact the loan provider to release you, the co-signer, from future obligations to pay.  Co-signer release is a terrific feature because it permits you to help your child borrow when they need your help. And for you to be released from that obligation when they get on their financial feet.

If there’s no way around it and you have to be the designated borrower, you should:

  1. Shop around. Many parents with good credit can receive substantially lower interest rates on private loans from banks, finance companies or state agencies than the Federal PLUS program.
  2. Be VERY wary of the Federal PLUS Loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan, but be wary.  The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high (the full cost of attendance).  Sounds good?  It’s not.  It is a toxic stew. The government regularly makes large loans to people who will be unable to make the payments.  This is a ticking time bomb waiting to explode.   Also, some parents falsely surmise that they will transfer their PLUS loan to the student in the future.  That is not possible under the terms of the PLUS loan. It is a Parent loan, not a student loan.
  3. NOT borrow from your retirement accounts to pay for your child’s college. It sure sounds good to “repay yourself” the interest that accrues on a loan rather than paying a bank, but it is a terrible idea. Why?  Every dollar you withdraw from your retirement account is one less that can earn interest, dividends or appreciate to grow your retirement savings – and at a time when your retirement is fast approaching.  Just as young families are instructed to start saving early to benefit from compounding, older savers should avoid touching the nest egg because you (we) are running out of time to grow the account. This is no time to stretch.

If you’re a data hound and seek some data about parent (and grandparent) borrowing, check out the Consumer Finance Protection Bureau’s recently released “Snapshot of Older Consumers and Student Loan Debt.”

Like many data analysis, this one can be used to support both sides of an argument.   Here, (a) older (age 60+) borrowers are under stress and (b) older borrowers are doing ok.     The CFPB report compares the 10 year period 2005-2015.  The data in parenthesis is 2005 data as cited in the report:

Older borrowers are under stress:

  • Consumers age 60+ is fastest growing segment of the student loan market
    • They owe $66.7 billion
    • There are 2.8 million older borrowers, (up from 700,000)
    • They owe on average $23,500, (up from $12,100)
  • Delinquencies are up from 7.4% (2005) to 12.5% (2015)
    • 37% of borrowers over 64 are in default
    • 40,000 have Social Security benefits offset (8,700 in 2005)

Older borrowers are doing ok:

  • 73% is borrowed for children or grandchildren – indicating a choice to help rather than being burdened by their own debt.
  • Fewer than 31% of older borrowers owed federal loans (867,000 of 2.8 million)
    • Fewer than 7.5% held PLUS Loans (210,000 holders)
  • Of 2.8 million borrowers, only 1,100 lodged loan complaints with the CFPB

What does this all mean?

To me, it’s clear.

  1. Parents should establish a college savings program for their family that is appropriate for their financial situation.
  2. Students should seek financial aid by filing the required forms.
  3. Parents and students should realistically assess how much current income each can contribute to defray costs while the student is in school.
  4. Students should be primarily responsible for taking loans for college. The federal loan program is the best solution for most of them.
  5. If parents are enlisted to help their students with loans, they should contribute by co-signing a loan with a co-signer release.
  6. If parents need to be the sole obligor to borrower for their child’s education, they should shop around, be wary of the federal PLUS program and not borrow from their retirement account.

I can’t help but think of the airline oxygen mask analogy.   There is a reason we’re instructed to put on our oxygen mask before taking care of a child.   Incapacitated parents are of no help to kids.  The same is true for parent borrowing for college.  If you feel compelled to help borrower for a child or grandchild’s education, be sure not to imperil your future well-being.  Co-signing a loan helps the next generation achieve their dream of a college education without imperiling your dream of comfortable twilight years.

John Hupalo on college planning solutions with “The Opening Bell” WGN Chicago

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Families putting together college plans are looking at different avenues to find success.  John joined The Opening Bell to share some insight from the book “Plan and Finance Your Family’s College Dreams“, helping families get through the planning process.

  • Starting early on savings will reduce the need to borrow in the future.  There’s 529 programs in place with creative ways to hit savings goals over time. Consistent long term savings combined with any gifts can really grow.
  • College value is different for every family. Be realistic, rather than pessimistic or optimistic.  The planning process has many little steps involved to determine the right fit school considering everything going on in a young person’s life.
  • During election season, we hear ideas about “free” college and student loan debt forgiveness being made more widely available.  At the end of the day, college choices come down to individual decisions based on personal goals and needs. Real solutions are not easily found through claims made during elections.

Check out the full recording beginning @ 19:43 on WGNRadio.com

 

October 1 FAFSA: Getting ahead on college funding

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For the first time, the FAFSA will be available beginning October 1.  This is a big move from the traditional January 1st date for FAFSA availability, and will change the timeline for financial aid processing with implications for admissions.  If you’re planning college admissions in Fall 2017, it’s already time to get started!

Prior-Prior Year Taxes (PPY): A move that will help streamline the process is the use of Prior-Prior Year Taxes to complete family financial information on the FAFSA. The 2017-2018 FAFSA will require info from the 2015 year tax returns.  Those returns have long since been completed by most families, and may be available for digital transfer from the IRS via their Data Retrieval Tool.  This means the financial details of your tax return can automatically populate the FAFSA, saving you time from data entry.  Also, using Prior-Prior Year taxes negates the need to make estimations on the FAFSA when tax returns were incomplete.  In the past, when FAFSA filers were required to use only the Prior year tax returns, they were encouraged to file the FAFSA on January 1st, before their actual tax returns were completed.  Now that tax returns from the Prior-Prior year are used, there’s no need to estimate.

Expect similar admissions deadlines: Most colleges are maintaining their same admissions deadlines. May 1 will still be the major deadline for enrollment decisions.  Early Decisions will be the exception from school to school.  The big impact early FAFSA makes is that there will be more time for schools to process new incoming financial information, and families can get a better idea of their financial aid eligibility earlier in the process.

Pay attention to institutional funding deadlines:  Institutional funding is money reserved by the college and awarded based on their own internal criteria and methodology.  Eligibility requirements and deadlines can vary from school to school.  Make sure to identify any deadlines for institutional funding to stay ahead of the curve. The simplest way to achieve this is by making sure all financial aid forms are completed and submitted in advance of any deadlines.

Remember the CSS profile:  The FAFSA obviously gets a lot of attention, but the CSS / Financial Aid Profile is also required for about 400 select colleges when applying for financial aid.  It goes more in depth than the FAFSA and is also available beginning October 1.

Dealing with uncertainty on the state level: Many states provide need based grant programs to students with low income based on data provided on the FAFSA.  While the federal FAFSA is available beginning October 1, not every state will have their grant budgets for the 2017-2018 years ready yet.  Be aware of any financial aid awards relying on estimates for state based funding as they may be subject to change based on final state budget legislature.

Top 5 reasons for 529

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April is #FinancialLiteracyMonth offering many reminders about the importance of saving. Thinking about starting a 529? Here’s 5 reasons why the 529 makes an excellent option.

1. It’s cheaper to save than to borrow:  It’s much more than “a dollar saved is a dollar earned” today, as many utilize student loans to cover the rising cost of higher education.  Having to borrow becomes a much more costly endeavor long term, where savings is a more attractive option.  For example, saving $100 per month averaging 4% rate of return compounded annually over 18 years would produce about $31,437.  If borrowing $31,437 at 4%, a 10-year repayment schedule would require monthly payments of $318.28 for a total of $38,194.24 repaid.  The $6,757.24 in interest costs may be a tax deduction in future years of repayment, but it’s clear that a little bit of early savings goes a long way to cover college costs.

2. No income limitations: Regardless of how low or high family income is, there are no income limitations associated with the 529 plan.  This is unlike the Roth IRA, a retirement savings program that is only available for single people making less than $116,000 per year or married couples earning less than $183,000 per year as of 2015.  Savers make saving a financial priority and are not limited by the 529 because of future gains on income.

3. Tax-free growth: Quite simply, 529’s offer a tremendous benefit of tax free growth.  Specifically, all earnings grow free from federal taxes.  Most states conform to the federal tax free treatment with 33 offering state tax deductions

4. Best savings option when considering financial aid: Families concerned their savings may affect their eligibility for need-based financial aid should take a look at the 529.  Ultimately, the way cash is saved is what’s most important. On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at 5.64%. For example, $10,000 saved in a 529 could end up reducing financial aid eligibility by $564.  However, this is much better than having money in a standard savings account in the student’s name, where it can be weighed against financial aid eligibility by 20%. The 529 provides a superior vehicle for college savings given financial aid regulations for higher education.

5. Great for estate planning: Grandparents are finding creative ways to help fund college for their grandkids while retaining control of their assets as part of their estate.  Money put into a 529 is removed from the taxable estate, but grandparents are able to retain rights of control over the 529 account even when funding is typically used to cover future college expenses for their grandchildren.   Generally, the goal of estate planning is to reduce tax liabilities and provide assets to family members as efficiently as possible.  Under current tax law, you are permitted to gift up to $14,000 per year to another person for any reason without having to pay a gift tax or a generation-skipping tax (GST). This limit is sometimes referred to as the “annual exclusion amount.” With a 529 Plan, however, you are able to make a lump-sum contribution equal to five years of annual exclusion gifts to a beneficiary in a single year. This means that you can give up to $70,000 (if you are single) or $140,000 (as a married couple) at once, per beneficiary, without having to pay gift or estate taxes.

Learn more about Invite Education’s 529 search engine and college savings calculator, helping your institution provide families with savings strategies and grade-by-grade guidance every step of the way.

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Provide the benefits of better college planning

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So many great benefits are being provided to employees through smart use of technology combined with insightful knowledge.  Just take a look at how employers like PwC are providing student loan repayment programs with Gradifi, or how companies can utilize Student Loan Genius to encourage employees to successfully repay student loan debt, even going so far as to match payments like a 401(k).

But all this focus on student loan debt begs the question:

Wouldn’t it be better if students could finish college with less debt in the first place?

Invite Education offers a complete planning platform that’s perfect for families managing the college process as early as Pre-K all the way to senior year of high school.  We make college savings the first priority to help families take control of their future plans. Along the way, as the student progresses grade by grade, admissions and testing criteria are highlighted in preparation for the academic competitiveness involved.  As college nears, scholarships and financial aid are highlighted along with cost analysis and comparisons to help finalize school choice.  Finally, after all other funding avenues have been secured, student lending insight is provided to help families make wise decisions about debt.

Taking the “big picture” approach helps benefit long term planners with smart college decisions early helping to ease future student loan debt burdens.  Some parents may still be paying off their student loans now, and want to find a better way to help their child.  You can make this program available for your employees 24/7 and customize it to fit with your pre-existing benefits package.

Invite Education: Are you ready to Learn More?

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