Parents know that college is expensive, and that paying off student loans after graduation can be a real challenge for even the most talented of students. It’s little wonder, then, that most parents would pay for their child’s college education if it were in their ability to do so.
Unfortunately, that’s often not possible. According to a recent survey conducted by LendEdu, about 45% of college students receive no help from their parents in paying for their education, and another 35% get just a little help from their parents.
Even if parents want to help their children pay for college, there just doesn’t seem to be enough money to go around.
But sometimes parents let their generosity and desire to help their children get the best of them, and they end up doing things to help their children pay for college that they really shouldn’t be doing. These are strategies that end up putting the parents’ own financial health at risk, often forcing them into an endless cycle of debt.
Below, we discuss 5 strategies that parents should never use to help their children pay for college.
1. Taking out Parent PLUS Loans.
Okay, I’m going to preface this by saying that I understand that PLUS loans are a lifeline for many students and their families who might otherwise not be able to pay for college without having to turn to expensive private student loans. They are certainly a less expensive option than private loans, and they help a ton of families every year. In fact, my parents took out Parent PLUS loans to help me pay for college, though we worked out an agreement beforehand that I would be the one responsible for paying them back.
That being said, parents should think long and hard before signing on for a Parent PLUS Loan, for a number of reasons.
For starters, PLUS loans tend to have a higher interest rate than the federal loans your child would receive on their own. Whereas an undergraduate Direct Loan had an interest rate of 4.45% as of 2017, Parent PLUS loans carry an interest rate of 7%. That’s a big jump, and an expensive loan for parents to be on the hook for.
Even if your child agrees to make the loan payments, the loan will be tied to your credit report. This will increase your debt-to-income ratio and potentially damage your credit score, which could make other financial goals difficult to reach. For example, if you were hoping to refinance your mortgage in the next few years, you probably shouldn’t take out any substantial loan now, or that might not be possible.
2. Using credit cards.
I just want to get something off of my chest: I absolutely hate credit cards, and personally never use them. That being said, they can be a valuable tool for many people so long as they are used responsibly.
But there is almost no responsible way for you to use credit cards to pay for college tuition. There are parents who use their credit cards to cover the gaps that financial aid won’t cover; there are parents who use their credit cards to buy textbooks or other college supplies. But unless these parents can afford to pay the expenses off before their next bill, they are losing out on so much money due to interest.
Credit cards carry an average interest rate of more than 15%, and some can go as high as 20% or more. These rates are much higher than any kind of student loan that your child would need to take out.
Simply put, there’s no justification for using credit cards to pay for college. Just don’t do it.
3. Tapping home equity.
There are parents out there who decide that they will do anything to help their child pay for college. One strategy that some parents use is tapping into the equity that they have built in their home: They will take out a home equity line of credit (HELOC) and use those funds to pay for their child’s college education. While generous, this is extremely risky.
One of the reasons that student loans carry higher interest rates than other kinds of debt is because student loans are so-called “unsecured debt.” They are not tied to any collateral that can be seized if the borrower stops making payments. Whereas a car loan is linked to a car, and a mortgage to a home, a student’s education cannot be repossessed. Yes, tax refunds may be seized and wages garnished if a borrower stops making payment on their student loans, but their house cannot be taken away from them.
When you take equity out of your home, you are essentially putting your home at risk. You are putting it up as collateral. If you are ever unable to make your payments, that means that your lender can very well take your home away from you as a last resort.
I would never recommend that parents use a HELOC to pay for college, for this very reason.
4. Using your emergency savings.
Everyone needs to have an emergency fund to cover life’s little surprises. If you’ve got money set aside for emergencies, then good for you: You’re on the right path!
When your child gets their financial aid package and learns that they’re a few thousand dollars short, filling that gap in funding might seem like an emergency, but it’s not. Not in the same way as a broken down car or a surprise root canal or a leaking roof is an emergency.
Frankly put, parents should not use their emergency funds to pay for their child’s college education. If you do, and then a true emergency strikes, how will you cover it? Probably by relying on expensive credit card debt (see #2 above).
5. Withdrawing from retirement accounts.
This is, again, something that some parents do to prevent their child from needing to take out student loans to pay for college, but it is a bad idea for so many reasons. Seriously. Just don’t do it.
First of all, the government created tax-advantaged retirement accounts (401ks, IRAs, 403bs, etc.) as a way of encouraging people to save for their old age. In order to prevent individuals from dipping into these accounts before retirement, they created some pretty steep penalties to disincentivize early withdrawals. That means that if you withdraw from your retirement account before you are at full retirement age (66 or 67, depending on what year you were born) you will be on the hook for potentially thousands of dollars in taxes and fines. Do you want to forfeit your hard-earned (and hard-saved) money to Uncle Sam? I know I don’t.
And second: Frankly put, that’s not what your retirement account is for. Your retirement account is there to help you pay for retirement. If you use your retirement savings now to pay for your child’s college education, that is money that will no longer be there for you when you are unable to work. What exactly will you do if you are forced into retirement because you can no longer work, but you don’t have enough money to live a comfortable life?
There are loans for college. There are no loans for retirement.
What to do Instead
If your child still has a number of years before they’re going to be applying for colleges, you’re in luck: You can start saving some money now to help them afford their tuition, books, and other college expenses. Even if it can’t cover all of their expenses, every dollar you can contribute will be one dollar less in student loans that they’ll need to take out. Anything is better than nothing.
If your child is already in college, or about to enroll, and you don’t have time to start saving, there are still ways that you can help your child afford school even if you can’t afford to pay their tuition. Helping them buy books, letting them live at home and commute, etc.
Remember, every little bit helps in the battle against student loans.