Tuition bills are due in August at most colleges, and many families still don’t know how they’ll pay what could amount to hundreds of thousands of dollars over four years.
College loans are the traditional way to make up any shortfall, but they might no longer be the best option. The interest rates on subsidized Stafford loans will double for loans issued after June 30, 2013, from 3.4% to 6.8%, unless Congress heads off the increase. Rates on private student loans sometimes top 10%, depending on the borrower’s credit scores.
A growing number of credit unions are offering loans for college expenses—sometimes at attractive rates—but these loans’ repayment terms are much less flexible than with federal college loans, which often offer deferment, forbearance or other options to borrowers who cannot afford to make payments.
Here’s a look at six alternative options that could help families pay for college…
These three college payment options carry significant potential financial downside, but they’re worth considering if handled with care.
- Home-equity loans/lines of credit. Borrowing against the equity in your home could provide cash for college at rates lower than those now charged by most student loans—and the interest portion of home loans is tax-deductible. Home-equity line-of-credit (HELOC) loans recently were available with variable rates of about 4.6%, while home-equity loans recently offered 6% fixed rates.
Downside: Fail to repay the money you borrow, and you could lose your home. As with other private loans, repayment terms are much less flexible than with federal college loans. The variable rates on HELOCs make them appropriate only for borrowers who are confident that they can repay within three to five years. Reason: If today’s low interest rates rebound significantly over the next five to 10 years, your HELOC payments could rise enough to become unmanageable.
Alternative: Investigate cash-out mortgage refinancing if you’re considering refinancing anyway. This would reset your mortgage rate to today’s low rates and let you pull money out of your home to pay for college. The interest portion of mortgage bills is tax-deductible. On the downside, it could leave you paying off college bills for up to the next 30 years.
Warning: The proceeds from a home-equity loan (as opposed to a line of credit) or a cash-out refinance will count as an asset on financial-aid applications.
- Loans from permanent life insurance policies. Whole and universal life policyholders typically can borrow against the value of their policies. The interest rates charged on these loans often fall between 4% and 6%, but refer to your contract or check with your insurer for details.
Downside: The insurance policy’s death benefit will be reduced if the loan is not repaid before the policyholder dies. Also, money borrowed from an insurance policy typically must be reported on college financial-aid forms as income. (To avoid this problem, use life insurance to pay only for the senior year. At that point, no further financial-aid forms will be submitted.)This option isn’t worth pursuing unless you already have significant equity in a permanent life insurance policy.
- Credit card 0% introductory offers. Some credit cards offer new cardholders 0% rates on new purchases during the first 12 to 18 months. Charge tuition payments on such a card, and you essentially get a 12-to-18-month interest-free loan. When that 0% rate nears its end, you might be able to roll the balance onto a different card that offers a 0% rate on balance transfers, extending your interest-free loan for perhaps another 12 to 18 months.
Downside: You can’t be certain that you will be able to transfer debt from one 0% offer to another each time a 0% introductory rate expires. Eventually, there might not be any 0% balance-transfer credit card offers available to you, which could leave you paying steep credit card interest rates of 15% or higher on any balance that you can’t pay off immediately. So this strategy works best if you have assets that you could tap into to pay off credit card debt at the end of the 0% period if necessary.
If you’re late with a credit card payment or break some other card-issuer rule, you might be required to pay an ultra-steep penalty rate of as much as 30%. The lower your credit scores, the more difficult it will be to obtain 0% offers.
Other problems with using credit cards to charge tuition payments: You may have to pay a transaction fee (often called a convenience fee) of 2% or 3% on top of tuition, especially if the college uses a third party to process credit card payments. And your monthly payments usually are a percentage of the outstanding balance, so they start off higher and gradually reduce. This is in contrast to student loans, which either have level payments throughout the life of the loan or start off low and gradually increase.
Warning: Some parents charge tuition bills on rewards credit cards to earn cash back or airline miles. Before doing this, contact the card issuer to confirm that tuition payments indeed qualify for rewards—some issuers specifically exclude tuition payment from their rewards programs…and some colleges don’t accept credit card payments at all.
LESS RISKY OPTIONS
These three college payment options do not carry substantially more financial risk than more common ways of paying for college.
- The military. Students who enlist in the Reserve Officers’ Training Corps (ROTC) are eligible for scholarships that can pay a significant portion of their tuition, college fees and textbook expenses (and an option to pay for room and board in place of tuition, if you qualify). For more information, call 800-USA-ROTC (Army)…800-USA-NAVY…866-423-7682 (Air Force)…or 800-MARINES…or visit FinAid.org/military.
There also are college financial-aid programs for military veterans who enroll in college, such as the Montgomery G.I. Bill (http://www.gibill.va.gov/).
Note: ROTC scholarships require a commitment to military service after graduation.
- Scholarships, grants and 0%-interest loans from businesses and nonprofits. Thousands of nonprofit and for-profit organizations offer money for college. Examples can be found at FastWeb.com and StudentScholarshipSearch.com.
Also do a Web search for the phrase “0% student loans” to find no-interest loan programs. These are separate from the 0%-interest loans you might be offered directly by a college or university, which would be included in the financial-aid package you received.
Downside: There is lots of competition for these scholarships and interest-free loans, and some have very specific eligibility requirements. Still, applying could be worth your while—one of every eight students in bachelor’s degree programs who applies to multiple scholarship programs receives at least some free money for college, an average of $2,800. These programs often have late-April/early-May deadlines, however, so you might have to wait until next year to apply for many of them.
- Tuition installment plans. Many colleges allow students to divide their tuition bills into monthly payments (either nine, 10 or 12 monthly payments, depending on the program). These plans typically do not charge interest, but a flat fee of perhaps $50 to $100 might be imposed. It’s a useful option for families who come up a bit short of the amount required in August.
Downside: Miss a monthly payment, and the student might not be allowed to attend classes or graduate until the college receives its money.