By Jonathan Howard, CFP®

It’s only natural to want the very best for your kids, especially when it comes to higher education. But college can be pricey—particularly if you can’t depend on financial aid.

The last graduation present you want to give your child is a pile of debt. On the other hand, the years between your children leaving the nest and your retirement are crucial for saving, paying down mortgages and other debts, and putting your money to work. So, how can you afford college without derailing your financial future?

Here are some ideas you can use now to help plan for college costs, even if your child won’t qualify for financial aid.

Manage the College List

While it may be tempting to create a bucket list of famous universities, the college list is where families can exert the greatest control over the size of the college bill. Think about building a list of schools where 60% of the list holds Target Schools, meaning the probability of acceptance is good and the cost is acceptable to you. Another 20% should be Backup Schools, options that are well within your price range and where admission is almost guaranteed. The remaining 20% are Reach Schools, where you cross your fingers on both admission and affordability.

Know the Price Before You Apply

Like most things in life, it’s important to know the price before you buy—or in this case, apply. You may be surprised to hear that the average cost for a private college for the 2023-24 school year was $42,162. This number reflects tuition only, not Cost of Attendance, which includes books, fees, and room and board, all of which combined can increase the bill by $20,000 or more.

You’ll also want to consider whether or not graduate school will be needed in your child’s career path. While undergraduate degrees are still valuable, they are increasingly less so as more and more top-paying positions require a graduate degree as a barrier to entry. Before even visiting campus, you’ll want to make sure you know the total cost including tuition and fees to avoid your child getting too attached to a school that will break the bank—especially if grad school is likely.

Websites like Niche.com can help you ballpark the cost of attendance at a given school. Also, every college and university is required to have a Net Price Calculator on their website. This calculator takes information about your household finances and student’s academics and returns an estimate of what that school will cost. Advisors may also have specialized software designed to help provide reasonable estimates of college expenses.

No matter what system you use to research the cost of a given school, make sure you are looking at the total Cost of Attendance. Many people look only at tuition. This excludes books, miscellaneous fees, travel costs, personal expenses, and room and board.

Manage Room and Board Expenses

After freshman year, consider off-campus housing options. Think of college room and board like a concession stand at the movies: often overpriced and potentially offering few benefits over do-it-yourself alternatives. Living off-campus and sharing expenses with roommates can be an effective way to manage the total Cost of Attendance. However, this will vary based on where your child goes to school. Living off campus in New York City, for example, will likely not generate the same level of savings as living off campus in Columbus, OH.

If you are able to handle the responsibilities of managing investment real estate, consider buying off-campus property where your child could live with roommates while in college. The roommates may contribute enough rent to cover the cost of the real estate, leaving your child with no housing bill, and potentially a paycheck as a building manager. After graduation, you will have an asset to either sell, exchange, or continue to hold in your portfolio. If real estate prices increase while your child is in school, and there are no unexpected repairs or maintenance costs, this strategy can potentially turn college housing expenses into an income-producing asset.

Student Loans

Despite what you may have heard or read, student loans are not the demon spawn of greedy bankers. Students and their families simply need to look before they leap. Debt is a tool, which, when used correctly, helps create advantages that outweigh the interest expense of the debt.

When it comes to using debt, prioritize loan sources that carry the smallest interest expense. This helps keep the cost of the loan smaller than the benefit you and your child enjoy from what the loan buys. High-interest loans should be the last loans you use. Instead, consider the following loans first:

Qualified Plan Loan

Your 401(k) or 403(b) plan may be available if you’re looking for a low-cost loan. If the plan supports loans, you may be able to borrow up to $50,000 or 50% of the vested account balance, whichever is less. The loan will need to be repaid within five years, and it will carry interest (generally around 5%). But the interest payment goes back into your account—not into a bank’s coffers. This means the actual interest expense to the borrower is 0%.

But be careful of how the loan will impact your household cash flows. 401(k) loans are paid back with after-tax dollars from your paycheck. In the same way your paycheck gets reduced by your pre-tax 401(k) contributions, the same will be true with your loan payment. Confirm you can manage the reduction in income before taking the loan.

Federal Student Loans

Unlike credit card or personal loan rates, Federal Student Loan rates are set by the U.S. Department of Education and are much more affordable than private loans. While private loan rates can carry interest of 15% or more, the Federal Direct Loan for Students carries interest that generally stays within 3% - 6%. With this loan, there are annual limits on the amount of unsubsidized loans your child may be able to receive depending on eligibility criteria, such as their year of study and whether they are dependent or independent students. The maximum loan amount for all four years is $27,000.

Also, Federal loans contain consumer protections you will not find in the private loan marketplace. Chief among these are forgiveness provisions, income-based repayment plans, and loan forgiveness at death. Make sure you are using available Federal Loans before exploring private education loans.

Secured Loans

Debt can generally be split into two categories: secured and unsecured. Unsecured debt is backed by the borrower’s creditworthiness and nothing else. Since there is no collateral for the loan, lenders are taking on more risk, and therefore charge higher interest rates.

Federal Student Loans are unsecured debt, which is one of the reasons they are so valuable. Nowhere else will a student with limited (at best) credit history be offered up to $27,000 of loans with interest in the low-to-mid single digits.

Secured debt has collateral. A mortgage, for example, is backed by the residence that was purchased with the loan. Since the lender has an asset they can seize if the debt goes unpaid, interest tends to be significantly lower on secured loans vs. unsecured loans.

Three sources of secured debt that can be considered for college are Home Equity Lines of Credit (a line of credit backed by the value of your home), Securities Backed Lines of Credit (a credit line backed by the value of the holdings within a taxable investment account), and Life Insurance Loans (loans backed by the death benefit of a life insurance policy).

While these loans generally carry lower interest rates than private student loans, credit cards, and personal loans, they have their own unique risks, complications, and impacts to overall financial stability and well-being. Make sure you consult with an experienced professional who can educate you on potential pitfalls from using these loan types. A good exercise is to look at what would happen in a worst-case scenario—namely, you can’t repay the loan—and see if the consequences are within your range of acceptable risks.

If you need additional leverage on top of the above sources to afford a particular college, seriously consider whether the potential benefit offered by the school is worth the impact to your family’s financial future. Because everyone’s situation is different, it’s wise to consult with a trusted advisor to help guide you through the range of options available to you.

529 Plan

A common method families use to save for college is a 529 Plan. Earnings accumulate tax-deferred and distributions are not subject to taxes when used for Qualified Education Expenses. There are two categories of 529 Plans: Prepaid Tuition Plans and College Savings Plans.

Prepaid Tuition Plans let you pay future tuition costs at today’s prices. Rather than relying on investment performance to cover the rate of inflation of the cost of attendance, the Prepaid Tuition Plan version of the 529 promises to cover a certain amount of the total cost. Often the terms of the plan apply differently to in-state vs. out-of-state vs. private schools, so make sure you understand what you’re buying.

529 Plans are state-administered instruments. Due to several years of double-digit losses in the early 2000s, Prepaid Tuition Plans struggled to keep up with the annual inflation of college Costs of Attendance. As a result, many states closed their Prepaid Tuition Plans to new customers.

529 College Savings Plans, on the other hand, work more like an education-specific 401(k). These plans allow you to save up to the Annual Exclusion for Gifts (currently $17,000 per person, or $34,000 for married couples electing gift-splitting) per year. 529s can be “super funded” as well. This involves investing up to five years’ worth of annual contributions (totaling $85,000, or $170,000 for married couples using gift-splitting) in a single year. Contributions are made after tax, but grow tax-deferred, and can be used tax-free for qualified education expenses.

529 owners grow their contributions using mutual fund-based investment options, similar to the investment options in 401(k) plans. Popular options within these plans are Target-Date Funds. Investors select a fund based on the years their child will attend college, and the fund allocates away from risk as those years approach.

Some states offer state income tax deductions for residents contributing to their state’s 529 Plan. SavingForCollege.com is an excellent resource for parents and college-bound children to research benefits and features of different 529 Plans.

IRAs and Roth IRAs

Outside of 529 Plans, people may use their Roth IRAs to save for post-secondary education. Contributions can be withdrawn at any time and can be used for any purpose. In addition, investment growth can be distributed for Qualified Education Expenses without penalty. This exempts the account holder from the 10% excise tax for withdrawing more than just contributed dollars from the account before the age of 59½. However, the account holder will owe ordinary income tax on the portion of the withdrawal representing growth.

The same is true for Traditional IRAs. A parent who needs to use IRA funds to cover Qualified Education Expenses will avoid the 10% excise tax for making a distribution before the age of 59½. However, withdrawn funds will be taxed at ordinary income tax rates. For a family that already doesn’t qualify for financial aid, this could result in a tax bill greater than the interest expense on a loan, particularly if you include the opportunity cost of pulling the money out of the tax-deferred account.

Careful consideration and planning should be done whenever a family is considering using retirement account funds to cover college costs. A good rule of thumb is that a person should only use an account for what the account is designed for: 529s are for college costs, IRAs and 401(k)s are for retirement funding, HSAs are for healthcare expenses, life insurance is for legacy planning, etc. If you are thinking of breaking this rule, exercise extreme caution.

Advice for All of Life’s Transitions

As a parent, you probably want your child to start their working life without the financial and emotional drag of big debt obligations.

At SeaCure Advisors, we understand that paying for college can be a big challenge, especially if you can’t rely on financial aid to help lower the bill. Our mission is to help people understand the unique opportunities their financial resources may provide them, and create a plan that delivers stability and confidence through every life transition—including sending children off to college.

Schedule an introductory call online, call us at 877-328-4037 or email info@seacureadvisors.com. We look forward to hearing from you!

About Jonathan

Jonathan Howard is a financial planner at SeaCure Advisors, a financial services firm committed to developing custom-tailored financial plans to help clients meet their specific goals and needs.

Prioritizing education, diligence, and communication with a high emphasis on tax planning, his goal with everyone he works with is to help them use their resources as tools to enhance their prosperity and well-being.

Prior to entering the financial services industry as a licensed life & health insurance agent, Jonathan spent 17 years in Los Angeles, working as an editor and visual effects artist. Jonathan holds a bachelor’s degree from Middlebury College as well as the Series 7, 63, 65, and CERTIFIED FINANCIAL PLANNER™ designations. He has contributed to financial articles published in Forbes, USA Today, Fox Business, US News & World Report, Kiplinger, Yahoo! Finance, and more.

Jonathan lives in Lexington, KY, with his beautiful and patient wife, two vivacious daughters, and two spazzy dogs. When he’s not working, he enjoys playing guitar, spending time outdoors, and family time. To learn more about him, connect with him on LinkedIn.

Securities offered through AAG Capital, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Accurate Wealth Management, LLC an SEC-registered investment advisor. Registration does not imply any level of skill or training. Insurance products and services are offered through Accurate Advisory Group and sold through individually licensed and appointed agents in all appropriate jurisdictions.