Parents: Should you borrow for your child’s college education?
Congratulations! Your son or daughter was accepted into his or her top-choice university. You have an extra $175,000 lying around, right?
Your offspring’s education may cost that much or even more, now that the average cost of attending a private school has topped $42,000 a year, according to the College Board. If you can’t cover the whole bill with scholarships and savings, you may be tempted to borrow.
But should you? Ask yourself these questions:
How secure is your retirement?
Parents struggle with whether to put their child’s needs before their own. If you’ve followed the financial industry’s advice and prioritized your own retirement savings, you may not have been able to save much for college. Talk to a financial advisor about your retirement planning. This will help you decide whether you can handle education loans.
What’s your current debt level?
Are you still paying off your own education? If so, you wouldn’t be the only one. Many people are still chipping away at their college loans well into their careers, even as their own children near adulthood. Taking on more education debt may not be advisable if you haven’t eliminated your own.
Mortgage loans are also a consideration. Paying off your mortgage before retirement can help reduce the amount of monthly income you need once you stop working, so crushing this debt may be a big priority later in your career. If your home is worth significantly more than you owe, that equity may be a good source of college money. The interest rate on a home equity line of credit is likely to be lower than the rate on a federal loan for parents of college students. And, like other types of mortgages, the interest on home equity lines of credit may be tax deductible.
What are your other obligations?
If you buy your eldest a car as a 16th birthday present, your younger children will expect their own wheels, too. Over-extending yourself for one child’s education may be hard to replicate when the next kid enters college. Make a realistic plan that includes all your children’s likely college costs.
So should you borrow?
If your retirement savings are healthy, the rest of your finances are strong and you don’t have much debt, borrowing to pay for your child’s college might make sense. But it’s a last-resort option. Before you take out a loan, exhaust all possible financial aid options. Consider choosing a less expensive school, or having your child start at a community college and transfer to a four-year university later.
Many families find that it’s best for the student to be the borrower, rather than the parents. The interest rates on federally subsidized loans are better if they’re in the student’s name, and you can always help pay it off later if your own budget will allow it.
Your role as a parent is not coming to an end just because your son or daughter has earned a high school diploma. You still have to model good decision-making practices and healthy financial habits. That may include saying no to borrowing money for your child’s education.