FINANCIAL PROBLEM SOLVED!

"College costs are $70,000 a year"

Problem

My children both recently started college. Their tuition, room and board, and other expenses cost about $70,000 a year. My husband and I take home about $120,000 a year, after taxes. We're both 48 and we hope to retire at 65, but we have only about $60,000 in savings.

I already have a $50,000 federal PLUS loan in my name. Should we have our children take out student loans in their names, or can you suggest alternatives? If they took out loans, we'd pay most of them, anyway.

Solution

Student loans are just one of several options you should consider. Make sure you keep in mind your overall financial plan, since your cash flow, taxes, and retirement savings will be affected.

Have you applied for a federal Pell Grant, which you wouldn't have to repay? You shouldn't assume you won't qualify for need-based financial aid; having two kids in college at the same time could work in your favor. For more information on Pell Grants, see The Student Guide, at www.ed.gov/prog_info/SFA/StudentGuide/2002-3.

If you own your home and haven't already refinanced your mortgage, you may want to do so and put the monthly savings toward tuition costs. Or, if your home equity has appreciated significantly, you might consider taking out an additional mortgage or home equity loan. You'd likely pay a higher rate on any home loan than your children would pay on student loans, but given your tax deductions for mortgage interest, this might still be the better financial deal.

Student loans can be very attractive, though. An example is the federal Stafford Loan, usually a simple-interest, government-guaranteed, no-collateral loan. The interest rate on loans taken out through June 2003 is 3.46 percent while the student is in school and 4.06 percent after graduation. This rate is variable and capped at 8.25 percent. A dependent freshman may borrow up to $2,625 and a dependent junior or senior, up to $5,500; for an independent freshman the maximum is $6,625, and for an independent junior or senior it's $10,500.

Your children may also be eligible for a Federal Perkins Loan, a low-interest (5 percent) loan for students with financial need. If they qualify, each child can borrow up to $4,000 per year of undergraduate study. The Student Guide, mentioned earlier, contains details and eligibility requirements.

Another avenue to explore is the Sallie Mae Signature Student Loan (www.salliemae.com/apply/borrowing/signature.html ). The interest is based on the credit-worthiness of the student borrower and repayment begins after graduation. If you co-sign for this loan, your children should be able to get a more-favorable interest rate.

Another point to consider: Have you borrowed the maximum allowable under the federal PLUS loan program? Given your children's tuition, you may be able to borrow up to $20,000 more, assuming the kids haven't received other financial aid. The interest rate, which can change annually, is 4.86 percent through 2003.

Finally, remember that you still have to save for your own retirement. Children have their lives ahead of them to earn money, repay loans, and save. You have less time to accumulate savings. Since you're both 48 years old and you're planning to retire at age 65, you need to start saving aggressively to build up your nest egg.

This issue's problem solver is Jarod J. Bloom, CPA, CFP (jarod@thedarrowcompany.com), a financial adviser with The Darrow Company in Concord, MA. Financial Problem Solved! is edited by Senior Editor Leslie Kane.

Do you have a question you'd like a financial adviser to address? Please submit it via e-mail to Solved@medec.com, or by regular mail to Medical Economics, 5 Paragon Drive, Montvale, NJ 07645. ATTN: Financial Problem Solved! If we select your query, we'll address it in an upcoming issue. Your name will not be used.

Leslie Kane. Financial Problem Solved!

Medical Economics

May 23, 2003;80:63.