Dear Parents of Seniors,

We wanted to touch base with you and see how you were doing in planning and paying for college.  Did you fill out the FAFSA?  Did it come back as you thought it would?  Did you qualify for any financial aid?  Are you negotiating with the schools for a better package?  Will you be taking out a student loan, tapping into your savings or retirement fund to pay for college?  Did you lose 50% or more in your 529 plans as many of our clients did?  Did you know there may be a tax deduction for those losses? Did you take advantage of the Hope Tax Credit?  Did you set yourself up for more financial aid next year when doing your 2008 taxes?  Is either parent in jeopardy of losing a job?  Do you already have one child in college and another getting ready to go?  How will that affect your EFC

We hope you know the answer to these questions and all is well, but if you haven’t figured out how you are going to pay for college by now… you could be facing some difficult times ahead.  If your student didn’t get all the scholarships, grants or financial aid you were depending on… you WILL have to choose or already have chosen one of the following three options: Paying for college out of your current cash flow, a PLUS Loan or taking out a Retirement Account Loan.  I guess if there is a fourth option at this point it would be winning the lottery.

Paying for College Out of Cash Flow

Many families in America today utilize the philosophy of we will worry about that when we have to with most of their financial decisions.  As a result, we as Americans have one of the lowest savings rates in the industrialized world at -2% and the highest personal debt liabilities in the world.

The question is simply this, are you among the many and if so why? 

Have you been following the same old advice that every Financial Planner, CPA and neighbor has been preaching for decades?  At some point the need for change becomes mandatory and it is generally discovered the summer before a parent’s first child begins college. 

How to pay for it?

For some the ability to pay for college is as simple as paying those costs out of current cash flow.  They simply either have the funds available to do so or are willing to make major lifestyle changes in order to make that happen.

Many of you will be looking at college expenses for one student of about $100,000 to go to college for four years. Let’s say for example… your Expected Family Contribution on average is going to be approximately $23,000 for a public university and approximately $22,000 for a private university not including any unmet financial need.

This means that you will need to budget somewhere between $1,916.00 and $1,833.33 per month respectively at a minimum for the next 4 years out of your current budget.  If this is possible it can be one of the most cost efficient ways to handle the college expenses, but if this is not a viable option for your family the next step is to evaluate the option of borrowing those funds from some other source.

PLUS Loans or Other Types of Private Financing

This is the option chosen by the majority of families and has worked for many for decades, yet they can be avoidable.

The idea is to leverage OPM (Other People’s Money) in exchange for a monthly payment and a nominal fee to borrow those funds.  Today that fee is 8.5% to 9.0% and those payments are relatively benign in the early years but will balloon heavily in the middle.  If you take $25,000 out per year for the next four years you will pay back about $158,000 over the next thirteen years!  Remember that is for one student… add in two or three more and you may be looking at over $300,000 in student loans to pay back. 

While this is the general course of action for many families and may in fact be the ideal way for your family is entirely up to you.  We desperately want you to try and avoid this.  What generally ends up being the case is that most families eventually run into a monthly cash flow crisis because their payments begin to exceed their ability to produce income. The initial payment is not all that bad, but as you progress through the college years the payment will put a significant strain on your monthly cash flow.

At some point the family needs to decide if they are going to look at cheaper colleges to preserve cash flow and debt liabilities or are they going to shift the repayment of these loans on to the student.  Only the family can decide if this is a viable option for them, how much debt do they want a child to emerge from college and begin their life with? 

Retirement Account Loans

Borrowing from retirement accounts may also be considered as a source for college funding.  The advantages of borrowing from these sources are a generally favorable interest rate and repayment terms and ease of obtaining the loan.  However, if these loans are not repaid within a certain period of time, usually five years, the outstanding principal balance becomes taxable income and subject to a 10% penalty if the borrower is under the age of 59 ½ .  Also, if the employee loses their job, the outstanding loan balance may have to be immediately repaid and could go into default within 60 days.  If it is not immediately repaid, taxable income occurs.  In addition, the borrower gives up the ability to defer tax on the withdrawn assets and is jeopardizing their retirement savings.  Furthermore, even if the retirement fund is earning interest on the College Loan, it is foregoing the interest it would have earned had it been invested in a safe, guaranteed 7.5% rate of return product such as a fixed index annuity.

It’s never too late to ask for help with your college funding strategy.  Now more than ever, we are helping families save thousands and thousands of dollars every year because they are following our strategy for financial stability and success during the college years. They have also put in place their retirement plan as well and are living free of stress.  They have decided to stop losing money in the market and invest in safer alternatives.  With the economy in crisis and the uncertainty we are all facing, now is the time to prepare for the future.  If you want help with your plan, contact us at info@dreamstrategy.com and we may be able to help give you more options.