Finding out that your child has been accepted into college is among the proudest moments in your life. But this situation can also create some anxiety when it comes to the tuition and fees you’ll be expected to pay. While this can be stressful, there are many methods you can use to help pay for your child’s tuition without completely emptying your savings.
Here’s a closer look at five options you can use to pay for college-related expenses.
1. Take Out a Federal Loan
First, you should fill out a FAFSA form for financial aid. This form will tell you the amount of aid your child can be approved for. If you want to take out a Parent PLUS Loan, a credit check will be made. If you qualify, you should be able to borrow as much as the total tuition cost minus the financial aid that your child receives.
2. Create a 529 Plan
Another option is to create a 529 plan, which allows you to start saving early. Any money you put into this plan can be withdrawn without applying taxes or penalties. Let’s say you invest $50 each month from when your child is born. If this account has an annual return of 5.7%, you’ll save upwards of $19,000 by the time your child is 18.
3. Use Your Life Insurance Policy to Pay for College
It’s possible to use your life insurance to pay for some of your child’s college-related expenses, but not every insurance plan works this way. The best life insurance plan is a cash value policy, which could be a whole life or universal policy. The cash available in a whole or universal policy can be used to pay for pretty much anything, including tuition. Term life insurance doesn’t have cash savings.
4. Take Advantage of Built-Up Equity
If you currently own a home and have already paid off some of the mortgage, you have equity in your home. This equity can be tapped into by taking out a home equity line of credit, a home equity loan or a cash-out refinance loan.
A line of credit uses the value of your home to provide you with credit that can be withdrawn over time. Home equity loans use your home’s equity as collateral, which makes it easier for banks and other lenders to justify providing these loans.
Cash-out refinance loans allow you to refinance your current mortgage for a bigger one. Any extra funds that remain from the refinance can be withdrawn as cash and used to pay your child’s tuition.
5. Tap into Your Retirement Savings
If all other options are unavailable to you, consider using some of your retirement savings. This option should only be considered if you have some wiggle room in these accounts. If you’re below the age of 59, you can withdraw retirement savings with an IRA account.
The Bottom Line
There are several options available when it comes to planning for your child’s educational expenses. The most beneficial solution is for your child to qualify for financial aid. Taking out a federal loan is also possible and pretty risk-free. If your child hasn’t reached 18 just yet, a 529 plan will allow you to start saving early. Tapping into your retirement savings or home equity can also be done. With the right life insurance policy, you can use these funds to pay for your child’s tuition.