An article that appeared in the Dallas Morning News on the 26th of September was titled “Plan Eases Stress of College Bills”. The article about paying for college seems to be a reprint from the New York Times and Ron Lieber. The sub-headline says “Expert urges combination of saving, paying expenses out of pocket and borrowing”. In my opinion “Expert” is a really loose interpretation in this case. There are several reasons why his suggestions could increase stress, especially financial stress on families for the college education of their children. The following are reasons why his advice should NOT be followed.
Save Early for College Expenses
Saving for school when your child enters this world is great advice. The vehicle he suggests, at least under current education laws is the wrong place. (See “Are 529 Plan Tax Benefits Really Worth It?” on this website). Saving anything for college is a great idea but putting it in the right place is a better idea! He suggests using 529 Plans but fails to mention how that impacts the amount of potential need based aid available to the individual student.
The other challenge to this “expert’s” recommendation to use 529 Plans is the risk associated with the stock and bond market that most of these types of Plans have your money invested in. It would be a shame to save a bunch of money saved towards your child’s college education just to have it disappear just before or during the time you need it by a market correction such as we saw in 2001 and 2008.
Borrow Money for College
One of the other suggestions made by the “expert” was to consider borrowing money to pay for school. He suggests that student loans may become scarce in the future. I don’t know what he is basing his assumption on but government (either state or federal) student loans are a way for the government to generate revenue. In any case, in my assessment, students should have skin in the game and be accountable for some of the cost of college. A great way to make them accountable is their ability to borrow over a four year period $27,000 on only their own signature.
The other suggestion that is made is to borrow against the equity in your home. This makes a great deal of sense to borrow out equity at today’s low fixed interest rates (tax deductible interest). The hole in his suggestion is where to put the money you borrow. His suggestion is to put it into a CD. While a CD would be liquid, the interest earned is taxable and the rates are currently pathetic. However the biggest “gotcha” in his “expert” suggestion is how the CD will impact the need based aid calculation. It doesn’t matter where the title to CD is placed either. The potential reduction in need based aid is bad whether you place the money in the parent’s name or the student’s name. There are better places to put the funds where liquidity and safety are maintained on the funds borrowed against the equity in your home, but more importantly, don’t impact the potential aid that could be achieved. The funds can also be placed where taxes are minimized.
Student Earnings While in College
The “expert” suggests that the student should work and earn a portion of the college expenses. I whole heartedly agree. However, the best working opportunities for students are to do work study on campus. There are several advantages to earning this way but again, the most important is how this type of earnings impact the need based aid calculation versus working off campus.
Conclusion to Experts Advice for Less Stress to Pay College Expenses
All in all, this expert’s advice is to:
- Save 25%
- Spend 25%
The article is unclear as to what percentage to borrow so either he is saying to borrow 50% or 25% but if it is 25%, he doesn’t suggest where to come up with the other 25%. In any case, the biggest problem with his “expert” advice is in the details of how to do what he suggests. With over $250 billion in college financial aid available, he completely disregards what parents and students can do to pay the LEAST amount out of pocket by increasing the amount of aid they could be eligible for. His “expert recommendations only will INCREASE the stress because you will pay more with your own nickels doing it the ways he has recommended.