As you can guess by the picture, the decision has been made regarding which university for Erin. The intent to register goes in this week, followed shortly by the housing application (she likes the mini-suites in Units 1 or 2 best). The next question is: “How do we pay for this?”
Now, I’m not asking “Where do we come up with the money?” That’s a more private question. My question here is: Given the variety of funding sources available, how should we prioritize them and what should we take from where. Here are the funding sources as I see them, excluding any merit scholarship money we might get:
- Student Savings. Savings accounts of the student, set aside in the student’s name for college.
- Subsidized Federal Direct Student Loans. Loans where the government pays the interest while the student is in school; student begins repayment of accrued interest and principle six months after graduation. Current rate: 6.8%
- Unsubsidized Federal Direct Student Loans. Similar to the above, except the student is responsible for all interest.
- Savings Bonds. Mostly issued in the parents name, payable on death to the student, but can be gifted to the student.
- California Scholarshare. Money accumulated in a
125(b)529 account. - Parent Savings. Money the parents have in, essentially, cash or near cash accounts.
- Parent Loans. Usually the Federal Direct Parent Plus Loans. Repayment starts 60 days after final loan disbursement for the year, although payments can be deferred while the student is in school. Interest accrues. Current rate: 7.9%.
Other factors to consider: Interest makes the overall cost of education more expensive, so a loan with a rate of 6.8% means that the school costs are 6.8% more than if you paid cash. If you can’t earn enough to cover that, you may be better off paying cash, if you have it. Further, there are origination fees of 1% for all Federal Direct Loans to students, and 4% for Direct Parent Plus loans. This makes loaned money more expensive.
Some additional factors: I know there is a tax write-off for tuition expenses, but I’m not sure how you get it. I know that student funds are “taxed” at a higher rate in the FAFSA form, so spending those down faster might mean more money in subsequent years. Savings bonds, if gifted, will probably be taxed at a lower rate; if they haven’t maxed out on interest, they are still earning good interest. Doing some level of student loans is a good thing — especially if you pay them off early — for it does wonders for the student’s credit rating. Also, if you pay them off quickly, the overall interest expense is lower (at least I believe student loans are simple interest and not amortized, like home loans). On the other hand, you don’t want to come out of the process saddling the student — or the parent — with excessive loans.
Here’s the ultimate question: given all these factors, what is the best approach to take in terms of what amounts to draw from what accounts. For example, the answer might be: The parent pays the maximum deductable tuition credit, and then turns to subsidized loans, paying them off that year. Scholarshare is used next, followed by Savings Bonds. Next is cash on hand from both parties, followed by unsubsidized loans. Now, that’s just a guess. I’m going to be asking my tax adviser on this, as well as the college planning folks, but I thought I would get your opinion as well. Those who have been recent students: What is the best approach?
Facing similar questions with my own daughter and for my recent education, I don’t have much to suggest except the following:
Pay off the interest on loans while she is in school, it will make a huge difference when it is time to start paying back any loans.
When you are budgeting, make allowances that it is difficult to complete a degree at UCB in eight semesters, only about 69% of students are able to do so and with the current cuts, I wouldn’t be surprised to see that number go down.
That said, this was one of the most competitive years for acceptance, so congratulations to your daughter for getting in.
Wednesday night we were at the UC Berkeley incoming freshman reception. I think, for Berkeley, the percentage completing in 8 semesters was higher — it was something like 85% overall complete in 8 semesters or less. She is coming in with loads of AP credits — which will help — and she’s in History, which is not an impacted major with less competition for classes, making it more likely she’ll be able to get into the classes she needs.
You’re right about it being competitive. There was an article in the Daily Cal on acceptance rates; I plan to write on that at lunch. What’s funny is that Berkeley was her — “I’m not sure I want to go; I just want to see if I could get in.” Then the private schools she wanted either rejected or waitlisted her, or didn’t give sufficient money, making Berkeley the better option. Then, when we visited on Saturday, it hit her: “Dad, I’m going to Berkeley. It’s a good school.” She fell in love with Berkeley (the college town is *so* much better than Westwood!).
With respect to loans, I’d like to have her (and us) come out with as little as possible, but I still want to have emergency savings. I agree with you on paying them off — that’s a great way to build her credit rating. I’m guessing student loans are simple interest.
Thanks again for your comments.