Your college-bound child has received less financial assistance than you anticipated. What is the next step?

Hearing that your college-going child will receive less financial assistance than expected, what should you do next?

The disheartening news is that the assisting package your kid's school is providing is not as generous as you desired. As a result, the share of the overall cost of college may be much higher than what you had prepared for.

The situation seems more alarming for those parents and students facing the lofty tuition rates of prestigious institutions in New England, where the annual sticker price before financial aid reaches $90,000 and above.

In 2023, the average annual cost at private four-year educational establishments was $60,420, according to the College Board. Considering the average grant to offset tuition expenses, parents and students were still required to pay an average of close to $35,000.

Even with public colleges, it's a wake-up call for parents who lack substantial college savings plans or haven't managed to save anything. In a few months, they must come up with far more money than anticipated.

So, what's the solution?

Aside from gathering all the relevant information about your circumstances, Beth Walker, the bearer of 'The Center for College Planning Solutions' and the author of 'Never Pay Retail for College,' suggests several tips to help navigate these financial waters.

Your child could potentially borrow funds. Don't feel too guilty about it.

If you initially opposed the idea of having your children start their independent adult life with debt before even graduating, it might be time to re-evaluate.

Freshmen may access a $5,500 federal Stafford loan with a decent interest rate of 5.50%. Yet, the rate moderately increases every July. Over four years of college, students can borrow a total of $27,000 from the federal loan system. And this might be the most beneficial funding option for students.

A comforting fact: Students don’t have to repay the money until they’ve finished their studies, and they can also take advantage of an income-driven repayment plan after graduating. You could even support them in their post-academic years with the additional funds.

Further Borrowing Options

Apart from Stafford loans, other borrowing avenues are available, but they involve several potential risks:

Private student loans: High school graduates might want to delve into private student loans. However, these options do not offer the same protective payment features as federal loans, and might present a notably higher interest rate. Although, if your child has a lacking credit history, you would need to co-sign these loans, which could impose further strain on you.

Parental loans: Your own parents can also apply for a federal Direct PLUS loan. However, Joseph Bogardus, a certified planner for college expenses, does not endorse this option due to the excessive fees (over 4% of the loan sum), the same-rate interest (currently 8.05%) and the fact that parents may have to make advanced loan payments while their children continue school, unless they apply for a deferment. In his words, "If you can't afford $500 a month now, what gives you the impression that you'll be able to afford $1,000 a month later?"

Your 401(k): In times of financial distress, a 401(k) seems like a viable solution, yet it's not an optimal choice. Usually, it's better to focus on retaining your retirement funds than withdrawing some to manage impending education fees. Nonetheless, if you're considering borrowing from your 401(k), make sure to transfer the amount to an IRA. Although, you'll be required to pay income tax on the removed sum, you'll avoid a 10% tax penalty if you employ it for qualified educational costs.

Your credit card: While having a credit card would allow you to borrow funds rapidly for your kid's freshman year, it's a suboptimal strategy. With a typical credit card facing an average rate of 20% or more, carrying a significant balance might elevate your payments and place you in an ongoing debt cycle in case of delayed payments or minimum payments.

Home equity line of credit: If you find yourself in a desperate situation with your child's first year of college costs looming large and your finances meager, you may want to consider an interest-only home equity line of credit. This could offer a short-term cash-flow relief, according to Walker, as you could defer principal payment while your child is enrolled in college.

For instance, take out a $20,000 interest-only HELOC with a rate of 8%. This would amount to a modest monthly interest repayment of $133, or $1,600 annually.

Although, you'll have to repay the principal in full after the designated term, usually 10 years. If it cannot be returned within the allotted time, you'll need to pay interest and principal on the browser balance until it has been fully repaid.

Even smaller actions can aid in narrowing the funding gap if you're trying to raise some funds until fall.

Calculate the price of having your child at home: Walker pointed out that many parents neglect the cost of having their offspring under the same roof. She suggests assessing how much your college-bound pupil expenses you while they are residence. Contemplate food, fuel, recreation, and miscellaneous expenditures. That's money you could redirect toward college expenses when they leave home.

«Shave a few bucks» on leisure money: In the months before your first-semester bill arrives, temporarily reduce your discretionary spending (like vacations and entertainment) and funnel that cash into a high-interest savings account.

Hold off or lessen certain retirement investments: It's not ideal, but if you believe you're doing fine regarding your retirement savings, you can divert the cash from your salary that would've gone into your 401(k) or IRA over the next three months and place it in the college coffers instead.

However, Bogardus warned, «Don't depend on it. Consider the oxygen mask analogy: When doing this, parents should first be in a stable financial condition for their own future, and then worry about their student's educational expenses.»

Be truthful about what you can spend

Higher education is a significant financial investment made by parents and their children.

It would be ideal if essential inquiries such as «How much can we afford?» were broached no later than when your child is in their sophomore year of high school, at which point you could set more reasonable expectations about the type of institution you (and they) can afford, Walker cited.

So, if you worry about your first-born's expenses this summer, you'll at least be more prepared when your second child starts considering college.

Consider and compare different educational establishments' costs, Walker recommended, and ask: Will a Bachelor's degree from a college that costs twice or thrice as much as another be worth the same when your child graduates?

Also, Bogardus advises checking to see if your state offers assistance plans or low-interest loans for educational purposes. For example, he said, investigate if your state provides a free community college experience for a year or two, then transfer those credits into the state college where your child could earn their diploma.

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Despite the financial challenge, it's crucial to explore all available options to mitigate the increased college costs. One solution could be for your child to consider taking on some student loans, as they have different repayment plans and benefits, such as not requiring immediate repayment during studies and low interest rates.

Moreover, if your family situation allows, you might consider borrowing against your 401(k) or taking out a home equity line of credit as a temporary solution. However, it's essential to weigh the potential risks and implications carefully before making such decisions.

Source: edition.cnn.com