Inside Money: The college backup plan

With the start of a new school year just around the corner, families of college students are already worrying about those pending tuition bills.

In the 2010-11 academic year, private colleges cost an average of $27,293 for tuition and fees and public in-state colleges cost an average of $7,605, according to the College Board, a non-profit education organization.

This doesn’t count room and board, meal plans, textbooks and lab fees. Ouch!

If you didn’t save enough, if your investments haven’t rebounded the way you had hoped or if you don’t want your student saddled with loans, there are alternatives. Here are seven ideas to help pay for college.

  • Home equity: While many homeowners over-leveraged and got into trouble when housing prices plummeted, others still have equity in their homes. A home equity loan or line of credit could be a smart pool of money to tap if you need college funds. Many advisors say you shouldn’t dip into your home’s value for any reason, but if you’re running out of options, borrowing against your home means tax-deductible interest and a flexible payment schedule if you qualify.
  • Your 401(k): Most investors have seen the values of their 401(k)s and other employer plans come back since the market downturn. If you have time before you plan to retire, consider a loan against your 401(k). Plans that allow loans usually permit you to borrow the lesser of 50 percent of your account value, or $50,000. You’d pay back the loan with a set interest rate that goes to your account instead of to a lender, and payments would come directly from your paycheck. However, before you jump in, know the disadvantages. You’ll miss out on growth while the loan amount is out of your retirement account. If you lose or leave your job, you’ll probably have to pay back the entire balance of the loan in short order. If you don’t, you’ll owe a 10 percent penalty and taxes on the amount, which would be treated as a withdrawal.
  • Ask Grandma: If you have older relatives who are flush with cash, or who speak of someday leaving you or your children an inheritance, ask for an advance. Wouldn’t Grandma enjoy seeing her money in action as your children get their college education? A taxpayer can gift $13,500 free of tax to any individual in 2011. A married couple can gift $26,000 in 2011. That’s a nice chunk of change for college bills.
  • Change your 529 plan beneficiaries: One of the advantages of 529 plans is that you can change the beneficiary to qualifying relatives, including siblings of the named beneficiary. Say you have two children four years apart. You’ve saved in a 529 plan for each of them, but you know you’re running short to cover tuition for your oldest. You could make the older child the beneficiary of the account meant for the younger child, with a pledge to save hard to make up the difference.
  • Get a job: If your current income is already spoken for, getting a part-time job could be the answer. You and your studentcan both find side work and earmark earnings for tuition bills. It doesn’t have to be flipping burgers. Offer to spruce up a neighbor’s yard, walk dogs, baby-sit, etc.
  • Search for lesser-known scholarships: Scholarships aren’t just for athletes and academic excellence. It may be too late for this academic year, but free money abounds. Your student may qualify for scholarships from community and religious organizations and thousands of other groups. Check out fastweb.com, which boasts some 1.5 million scholarships worth more than $3.4 billion.
  • Go on the cheap: Rather than a dream school, start slowly, and cheaply. Tuition and fees at public two-year schools average $2,713 per year, according to the College Board. Your student can transfer after you’ve had more time to save. If a cheaper school isn’t an option, consider opting out of on-campus housing to save on room and board costs.
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