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.

Check out Invite Education #MyCollegeCorner on YouTube

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Making sense of complex college funding questions just got easier!

Check out the Invite Education YouTube channel for #MyCollegeCorner videos featuring answers to your most common questions, and insight on how best to proceed.

The Free Money Mini-Series begins this week bringing light to the subject of grants and scholarships, your favorite money from the financial aid office since it does not need to be paid back like a loan.   Like, Share and Subscribe!

 

‘Tis the season for College Savings: 3 Painless Holiday Tips

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The year-end affords the opportunity to reflect and optimistically plan ahead. Use these three holiday hints to get started and by this time next year, you’ll be proud of your accomplishments. (…and don’t forget to clue in grandparents and other relatives to get a bigger bang for your buck!):

  • Check the couch for loose change – 2017 style:   I was riding the elevator with a woman who was reading Plan and Finance Your Family’s College Dreams and she offered one of the best tips I’ve heard:
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    …find more than loose change in your checking account

    Check the automatic payments connected to your checking account and cancel those you don’t regularly use or need.   She found more than $75 per month – loose change in the couch, 2017 style.  Next year, her re-allocated spending will fill up a 529 college savings plan with nearly $1,000. It’s repurposed “found money” that has no impact on her current spending or life style. Brilliant. How much can you find?

  • Make the Gift of College a Holiday Present: 2016 was a breakthrough year for innovation to make savings in 529 Plans easier. According to the College Savings Foundation, 90% of parents said that online and other gifting options would make college savings easier – and their holiday wish has been fulfilled. These innovations come in many variations so finding options that work well for your family should be easy. The College Savings Foundation outlines the various opportunities, which include:
    • Online gifting and/or gift certificates and coupons that can be printed and presented as gifts – with the gifted amount automatically deposited into a 529 account.
    • Emailed invitations offering gift givers access to make a gift directly into a 529 account.
    • Customized web pages with family or beneficiary (student) specific information.
    • GiftofCollege cards available at Toys’R’Us and Babies’R”Us or from some employers allows gifts to be made into any 529 Plan offered in the country.
  • Use Credit Card “Cash-Back” Rewards to Fill up 529 Plans. Find a credit card linked directly to 529 Plans or be disciplined about depositing Cash Back Rewards from other cards into a college savings account. The great things about these programs is that they allow you to fill your 529 coffers as you go through your normal day: no behavioral changes are necessary. Just be sure to not roll-up big credit card bills that you can’t pay in full each month to avoid paying big interest that will easily wipe-out the amount you can save.
    • Credit Cards linked to College Savings. There are several credit cards that permit users to accumulate cash back rewards to be deposited into 529 account. Some of these programs include:
    • CollegeCounts 529 Rewards Visa Card offers 1.529% back for those with a 529 Account offered by Union Bank in Alabama’s 529 Program and the Illinois Bright Horizons.
    • Fidelity Rewards Visa Signature Card offers 2% cash back to certain Fidelity accounts including Fidelity managed 529 Plans.
    • The Upromise MasterCard offers a range of cash-back benefits depending on the products purchased and the merchant from which they were purchased.
    • Other Cash Back Cards. Even if your credit card is not directly linked to a 529 Plan, you could easily take some or all of those cash rewards and deposit them into a 529 Plan. Every bit helps!
    • Learn more: “Using a credit card to save for college” from New York Times Money Adviser.

Each of these will allow you to increase savings without changing any of your current spending or giving habits. Find one or more that work well for your family. Recruit grandparents, relatives and friends to help and you’ll accumulate a nice nest egg that will no doubt reduce the amount that might need to be borrowed for college later. A dollar saved today is better than one borrowed tomorrow!

Send your success stories and other tips to info@Inviteeducation.com as you plan, save and succeed in 2017.

Happy Holidays!

John Hupalo is the Founder of Invite Education and co-author of the recently released book: Plan and Finance Your Family’s College Dreams: A Parent’s Step-by-Step Guide from Pre-K to Senior Year

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

 

Invite Education co-founder Peter Mazareas talking college affordability on Plan Stronger Radio

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Peter Mazareas joined Plan Stronger Radio with host David Holland to cover the topic of college affordability, a major issue faced by many families, especially this time of year.

Peter covers some critical topics by sharing his wisdom and expertise, especially important for families approaching this challenge:

  • College planning is recognized equally with retirement planning given the size and scope of the process.
  • How can families simplify college planning given all the financial variables?
  • What can be done to increase college options and reduce debt dependency?
  • What are some smart strategies that can help with college savings?
  • How the new book “Plan and Finance Your Family’s College Dreams” helps families every step of the way from early planning to graduation.

Invite Education Featured on “Money Matters” @KPFTHouston

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It’s “Back-to-school” season and parents are looking for answers when dealing with the high cost of college.  Join Chris Insley of the “Money Matters” show on @KPFTHouston interviewing Invite Education CEO John Hupalo to discuss the new book Plan and Finance Your Family’s College Dreams.  Early savings strategies, student lending, choosing a major, considering career opportunities and other key topics are up for discussion and solutions.

Interview: Invite Education CEO John Hupalo on @KDURradio: “Plan and Finance Your Family’s College Dreams”

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Rachel Frederico host of “Off the Rim” at Fort Lewis College Community Radio (@KDURradio) interviewed John Hupalo on the topic of college costs, savings and student loans, providing insight from the new book “Plan and Finance Your Family’s College Dreams.” The interview covers many topics including:

  • How college financing is a holistic planning process covering the years of early childhood leading up to high school graduation.
  • Why 529’s are so advantageous.
  • Translating the “lingo” of the college funding process into plain english.
  • What is a Gap Year and why it matters before college?
  • How can students and parents best manage college loans?

Check out the full recording:

 

Student debt crisis does not require a big government solution. Here’s my full Letter to the Editor of the Wall Street Journal

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Kudos to WSJ for maintaining focus on the student debt crisis and offering its pages to voice various views.  On Wednesday, August 10th, the Journal  printed my Letter to the Editor — see the full letter below.

My view in short: families empowered with better information, tools and services AND the emotional demeanor to choose less expensive schools over “brand-name” schools can avoid excessive student debt.  The educational outcome is likely to be excellent and their return on investment substantially better because they did not choose a higher cost, debt laden path.

What do you think?

To the Editor:

My career has been focused on helping families plan and pay for college: 20+ years as student loan investment banker, former CFO of First Marblehead Corporation (NYSE:FMD), school board member, education entrepreneur and, recently, the co-author of “Plan and Finance Your Family’s College Dreams.”

Sheila Bair hits a few of the high notes of the college financing crisis. The root problem: everyone’s to blame. The Congress has tinkered around the edges of a student loan program established in 1965 when it provided many students with low cost loans with caps that nearly covered 100% of education costs. The current Administration’s political response is to find ways to forgive student loans. Colleges have zero incentive to control costs. Some for-profit schools are bogus. Taxpayers appear oblivious to the fact that we pay for every defaulted and forgiven federal loan. Borrowers seemingly prefer the status of victim of greedy lenders and corrupt schools to educated consumer that no one forces to sign a loan note.

College affordability is within the grasp of all families starting with the acceptance of personal responsibility for the contracts signed.   Loans should be the last resort, not the first alternative, to pay for college – no matter what the government or the schools say. Families should first use savings, financial aid, scholarships, current income and other “free money.”  Then project the total amount of debt that might be needed. If it exceeds the projected first year salary after college, the school is not affordable. Finding a less expensive school, working for a year, living at home or taking any number of other actions is far preferable to being the next headlined poster child in the college financing crisis.   This is a solvable problem that does not require a big government solution.

 

How do I save for retirement AND college?

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Finding balance between retirement savings and college savings represents a challenge most families need help managing. If you feel overwhelmed, you’re not alone. Consider some eye-opening statistics from Roger Michaud’s recent article “Financing Education is a Retirement Issue “

  • When it comes to financing a college education, 21% of parents would delay their retirement and 23% would withdraw money from their retirement account to help fund college
  • 94% of parents believe college savings will impact their ability to save for retirement
  • 56% of parents with children in the home are currently saving for retirement

The struggle is real, especially when parents would actually withdraw from their retirement savings to help fund college. Early withdrawals face taxes plus potentially a 10% early withdrawal penalty making it less of a financial plan and more of a knee-jerk reaction.

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Find Your Balance

Why? Let’s consider the circumstances. Retirement is most often cited as a goal for long-term savings, but the rise in college costs has emerged as a financial challenge as well. Retirement planning extends beyond the typical 18 years leading up to college attendance, and parents may have started saving for retirement before they got married and had kids, giving them a head-start. This creates a false sense of security where a parent may simply feel comfortable pulling money for retirement to help fund their child’s college dreams, but this is unsustainable. Here’s how families successfully manage both.

Start with retirement savings: Securing your long-term financial goals puts you in best position to help your children over time without unnecessary financial sacrifice. Every dollar counts, and the tax benefits provided by Traditional and Roth IRA’s, 401(k) and 403(b) really help long term savers. While you cannot predict the future of your child’s academic plans, you do know and understand your own future financial needs better than anyone else. Once you’ve mastered your retirement plan you can more confidently pivot the remaining income towards college savings.

Play the long game with college savings: Take a big picture perspective, developing your patience and putting value on consistency. This is a relaxing exercise far removed from an overly busy day-to-day life, so enjoy it and you’ll thank yourself many years down the road. Stay motivated by reviewing savings progress as consistently as you would review your child’s report cards every semester / quarter. You’ll notice that as the savings grow, your child’s academic progress will help you zero in on admissions criteria for various colleges, further motivating you to stay the course. Maintain active engagement by using simple online tools like Invite Education’s Passport for Success that outlines college savings and academic planning all on one platform.

Enfranchise your child: Help your child develop their role as an active saver for college. During the key early years, its expected parents and perhaps relatives will make the lion’s share of deposits in college savings accounts. Once the child begins some part time work, have a portion of those earnings added to the college savings account to help them get involved. This helps develop an all-important habit of saving, a key lesson often overlooked but sorely needed for financial literacy education.

Forecast Financial Aid: Savings are accounted for as part of financial aid eligibility calculations, but the way the money is saved makes an impact. For example, cash in a checking account in the student’s name can weigh against financial aid eligibility by as much as 20% of full value on the Free Application for Federal Student Aid! There’s a better way. If you’re worried about financial aid eligibility, just remember;

  • It’s cheaper to save long term than to borrow and pay back loans later
  • 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% of full value, a great reduction from cash found in a checking account.

In other words, college savers are not punished for their efforts. It’s the income from work declared on the FAFSA that can reduce financial aid eligibility more dramatically. Always use a financial aid estimator to forecast and plan ahead, but you may quickly determine that your income would remove eligibility for Pell or State based grants. This reinforces the need for college savings with an early start date to allow greater time to compound, putting your family in better position to handle college expenses as they arrive. This is especially important for families considered “middle class” as they may have just enough income to reduce financial aid eligibility, but lack the actual cash to pay college outright. A dedicated college savings strategy is critical in such cases.

Early college savings strategies for children

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Parents are inspiring their kids to learn financial literacy with a simple message: save for college! It’s a worthwhile goal helping to build healthy financial habits for life and also to reduce the need for student loans in the future. Here are some ways that parents can help their children get on the right track early and stay the course.

  • Learn by doing: The number one way for students to begin saving early for college is to actually do it. The very act of taking money and putting it into a specific account for college savings is instrumental, not just for growing education funds but also learning a healthy financial habit for life. For early savers, it’s simply a matter of motivation.
  • Encourage financial literacy: Embrace financial literacy and learn about money: how to save it, how to spend it, and how to make it work for you. Even with digital money and payment platforms becoming more common, parents can begin to encourage their children to understand financial literacy by explaining about the different coins and dollar bills, and help them put money into a piggy bank or a savings account. As they mature, you might begin talking to older children about investments and different kinds of savings. The key is to have open conversation about personal finance, so that kids learn early that money is something to be managed properly. If that didn’t happen for you, it’s never too late to learn.
  • Learn to budget: This is a great exercise for students and parents. Take a week or two to record all of your purchases and see how much you spend. Record all of your income. Categorize your expenses and determine how much of your income can go into savings. Though “expenses” may be limited, kids should get into the habit of doing this so they can manage a personal budget as they mature. The 50/30/20 method of budgeting suggests breaking things into percentages in the categories of fixed costs, financial goals and flexible spending, but there are many ways to do this.
  • Put a percentage of gifts away: Gifts from birthdays and other holidays are great opportunities to boost college savings accounts. The trick is allocating it to savings before it is spent! Put a percentage of each gift into that account and watch the money grow. One of the most fundamental aspects of starting early is that thanks to interest, your money will be worth more years down the line when you need it.
  • Getting a job: The best way to increase income is to make money on a regular basis through work. A student’s first priority, especially in high school, needs to be their education, but flexible jobs give you the opportunity to earn money of your own. Babysitting is a great job for high schoolers, because it’s flexible and families often need babysitters on the weekends. When the kids go to bed, you often can do homework, accomplishing two things in one go. Other jobs that have weekend shifts include being a cashier at a grocery store or convenience store, working in a bakery, working as a golf caddy, or serving in a restaurant. Students with an entrepreneurial streak might start their own dog walking business or make things to sell.
  • Be consistent: Having a good plan in place is important, but what’s more important is putting that plan into action. If you plan to save $100 a month, continue to do that. It’s important to stick with it until it becomes second nature. You’ll be grateful that you did when you approach college and have a sizable savings account to help pay for it.
  • Parents and children work together: Financial literacy brings families together with a shared goal of greater prosperity. Parents can help set up the paperwork for a college savings plan while their children follow through with their consistent plan to earn and save money.  
  • Keep parents or grandparents as 529 account holders: Make sure to maximize savings in relation to potential financial aid eligibility by making the parent (or even grandparent) the account holder of 529 savings. It turns out that savings in a student’s name can reduce financial aid eligibility, by increasing the family’s “Expected Family Contribution” Money in a child’s name (like in checking/savings accounts) is counted as a student asset on the FAFSA, with as much as 20% of it’s value weighed against financial aid eligibility. This presents an unfortunate situation when it comes to college savings and financial literacy; you want your child to learn about saving money, but you also want to get the best value for college savings. There are significant benefits to keeping the majority of college savings in the parent’s name. A 529 in the parent’s name counts as a parent asset, and is assesses 5.6% of its value against FAFSA eligibility, a lower rate than a student asset. This comes into play during the need analysis process, which shelters parents’ assets more than it does those of their children. There are a number of strategies that you can use to maximize your aid eligibility. For students who are saving for college, it could be helpful to have them save the money but put it into this account under the parent’s name. That way, you are maximizing the potential for aid.

The idea of getting students to start saving for college early isn’t just about growing their contribution to their education savings, though that’s important. It’s also about children learning to manage their money and starting off strong so that they can grow up to be independent adults. It’s important because having them pay for a portion of their college costs gives them more ownership over the process because they’re investing their own money. Financial literacy is a skill for life; by starting young, children are are set up for financial success early.