Carla Fried: Paying for College – Essential Dos and Don’ts List | New

With list prices that can exceed $ 50,000 a year, college can be a huge financial drain for families who don’t plan and shop wisely.

Case in point: Nearly one in five people who take hardship out of their 401 (k) retirement plan do so to pay for tuition or other school expenses, according to the Transamerica Center for Retirement Studies.

Well-meaning parents want the best for their children. But plundering their retirement today means they may not have enough to support themselves in retirement. Which means their children might need to step in and help eventually. Which is not the goal of a parent.

To avoid trouble and get the best deal on quality education, follow these rules:

“Hands off retirement savings. Period. No withdrawal. And no 401 (k) loans either. The big risk is the opportunity cost. Withdraw a large sum of money, and it’s dollars that stop piling up for you. The stock market tends to grow in sudden surges, not a smooth line. For example, in the 15 years to 2020, a $ 10,000 investment in the S&P 500 would have grown to over $ 41,000. But if you only missed the top 10 trading days over that 15 year period, you would have less than $ 19,000. Just 10 days brought the annualized return from almost 10% to 4.3%.

The other problem is that your best intentions to eventually fulfill your Pension saving can prove elusive. Many people who expect to continue working in their careers into their 60s end up being kicked out sooner than expected. And of course, illness can intervene, or the need to be a caregiver for a loved one.

“Don’t slow down your retirement savings. For all of the reasons just explained, there is never a good time to slow down the contribution to your 401 (k) or IRA. It must remain a priority.

– Don’t start looking at home equity. For homeowners, there is a good chance that the value of your home has increased in recent times. A national index of home values ​​rose 18% in the 12 months to June 2021. The five-year national gain is over 40%. That makes a Home Equity Line of Credit (HELOC) viable, doesn’t it? Be very careful. In the extreme case that you cannot pay off the line, you could lose your home.

More practical is to think about how you would reimburse the HELOC. If your plan is to eventually sell the house and pay off your mortgage and HELOC, where would you move next, assuming you would make less profit after paying off both debts? In addition, there is no law that says today’s high values ​​are a floor, not a ceiling. As we all know from recent history, prices can go down.

– Don’t borrow first. Federal More ready The program that parents can use to pay for their education is not as good as the federal student loans your child may be eligible for. (All students are eligible for federal loans, regardless of family income.) In addition, there are safeguards on how much an undergraduate student can borrow under the federal loan program. A huge problem with the parent PLUS program is that it allows unlimited borrowing at pay for collegewhether or not parents can afford to borrow money.

– Become an informed consumer well before your child’s last year of high school. A worthwhile investment is the book “The Price You Pay for College” by Ron Lieber.

—Consider seriously whether a four-year degree is necessary for what your child wants. There are many strong careers that require a two-year associate’s degree, and earning one at a community college can be a financial gain for the whole family. Insisting that your child get a four-year degree when they are not interested in a career that requires a four-year degree is unlikely to be a great experience for anyone.

Or the family plan may be for the student to start at a community college with an eye on transfer to a four-year college. It can also save a ton of money. Just make sure you know the tricks of the trade to make the transition.

—Look for schools that will offer an affordable net price. All schools are required to publish their net price, typical disbursements to attend. For four-year private schools, the average net price is 45% lower than the list price. The catch is, you need to focus your child’s research on schools where they will want to offer you not only admission, but a significant discount as well.

– Consider the potential future value of a given degree. Read my colleague Arianne Cohen’s explanation of a precious college cost / reimbursement dataset on graduate income and debt for specific degrees at specific schools.

—Explore a financial aid offer for deception. Some schools like to play fast and free by including parent PLUS loans as part of the aid program. If, after negotiating with the help desk, the necessary family contribution is going to be a long-term burden on your family, the right decision is to refuse and consider another college that will not jeopardize long-term security. of your family.

( covers the worlds of personal finance and residential real estate.)

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