Five Tips to Pay for College
without leveraging the family home
Over the course of the recent borrow and spend decade people from all walks of life and education levels convinced themselves of the craziest ways to spend borrowed equity from their homes! In spite of wall to wall coverage in the media, it hasn’t changed that much in this decade either.
Recently, a man entered my office and asked me to expedite the closing date of his cash-out mortgage refinance transaction in order to free up the available funds on his Home Equity Line of Credit that he had already maxed out once before with varied consumer purchases so that he could take a $4,000 draw in to pay for a week-long vacation rental at the North Carolina beaches with his ADULT children and grandchildren! To be clear, I am all for vacationing with family and enjoying the fruits of your labor but when it’s borrowed money that is secured by your family’s home, well that’s downright foolish and I don’t recommend it one bit.
With most of the country still reeling from the hangover caused by the Roman orgy of real estate lending from the previous decade it seems premature to begin taking cash out of your home for something as unsure as a child’s education, but that’s exactly what some people are doing. Recently I have encountered a growing number of 40 something Gen-X’ers doing something even crazier; borrowing to pay for their kids’ college with money borrowed against their home! Most children of this generation are still in grade school and are years away from graduating even from high school. But because mortgage rates at or near their historic lows and with rising real estate prices, many parents have begun eyeing their homes perceived equity as a means to bridge the gap between the rising cost of college and their children’s college savings fund.
Fidelity Investments, the nation’s largest 401(k) administrator, reports that the average balance in its retirement plans was $72,800 at the end of June. If you expect to retire at 65 and live another 20 or 30 years, that amount won’t get you far. With the single largest expense for most Americans being housing costs, it seems that getting to retirement without a mortgage payment ought to be the primary goal of anyone who hopes to retire.
According to College Board, the four-year graduation rates of bachelor’s degree-seeking students at four-year colleges have increased only slightly from 2008 to 2010; in 2008, 35.9 percent of students graduated in four years compared to 36.7 percent of these students in 2010. And as of 2010, 58.8 percent of first-time, full-time bachelor’s degree-seeking students in the nation’s four-year colleges graduate within six years. Simply put, there is a significant number of students who will never graduate with a degree.
The real cost of college
The cost of a 4 year degree can vary from $9,000 per year for tuition and fees (housing not included) to as much as $35,000 per year! The average price of a private college has hit $88,872, and a public college, $23,344, according to the College Board’s “Trends in College Pricing 2006” report. The implications are enormous.
How Can a Parent Help?
- Use the Golden Rule; He who has the Gold Makes the Rules. If you insist on paying for your kid’s college tuition then it should be the mature adult who is paying who should make the decisions of where that child goes to school, at least during the first two years.
- Your budding academic should get their basics out of the way at a two year community college. Comparatively the average cost is less than $2,000 per year in total! Have them stay at home to defray the cost; after all you already own the home! Better yet, have your college bound High School Junior/Senior take college level courses at the local community college, most have programs so the cost is nearly nothing when taken through the local North Carolina public schools.
- With prerequisites cheaply behind him the options are limitless and with much of his college budget still unspent he can transfer to an in state public university. Most of the cost can be covered by government insured Stafford Loans of which most can be borrowed by the student and not the parents this way the student has some skin in the game.
- By this stage your student should be more mature, wiser and hopefully motivated to graduate in two years and not six, needlessly spending tens of thousands of your dollars on his/her misspent youth. If they obtain a degree and you are in a position to help, (meaning that you have fully funded your 401(k) and are not debt laden with consumer debt then feel free to write a check to pay off the money they borrowed as a reward for their accomplishment.
- Refinance your loan only to improve your cash flow and/or to reduce the term of your existing mortgage. In other words, don’t increase your loan balance or extend the length of time to pay off your mortgage. By reducing your monthly payment, you can help your college student by a monthly allowance to help him or her with monthly expenses that don’t have to be added to student loan debt.
Final thought on borrowing to pay for college
It astonishes me how many young people have advanced degrees and $60,000 or and more in student loan debt who earn less than $40,000 per year!
Here’s a good rule of thumb for the new world that we find ourselves in where the real unemployment and underemployment rates in some parts of the country are much higher than the official rate.
Because there are no guarantees how long you will have that job or how long it will take to replace it if you do get laid off, your student should never borrower more money than the graduate should expect to earn in their first year out of school. Given that the US Department of Education is rumored to use S.W.A.T teams to collect on defaulted student loans, consider also what those positions pay. Good places to research career salaries are Occupational Outlook Handbook published by Bureau of Labor Statistics (bls.gov) and Salary.com .
Ricardo Cobos is a licensed mortgage loan officer in Raleigh-Cary-Durham North Carolina who has been helping families achieve financial security through responsible home-ownership since 1998. (919) 526-0183