If you are trying to figure out how to pay for college, then you may be considering using a student loan, credit card, home equity loan or even your retirement savings. Before you make any decisions, read about the 5 worst ways to pay for college and make sure your strategy is sound.
1. Borrowing blind.
Too many students and parents take the easy route when borrowing for college. Simply wanting to get the process over with, they fail to shop around, compare options, and understand the rates, fees and terms of their loans until it is too late. While it may feel like a chore, doing the research can save you lots of money and keep you out of loan trouble.
2. Paying on a credit card.
Paying college tuition on a credit card if you can't afford to pay it off that month is never a good idea. Some credit cards have APRs in the high teens or even more than 20% making it very costly to repay. If you need to borrow for college, student loans are typically a much better option with much lower rates. If you think you want to put your tuition payment on your credit card to earn rewards, first ask the bursar's office about fees. Many colleges pass on the processing fee (typically around 3% of the total transaction) to the payor, so those rewards could be a wash, even if you pay the balance right away.
3. Cosigning for a loan you don't plan to help with.
If you want your child to be fully responsible for a loan, cosigning might not be the best option. Sometimes students get into financial trouble, and the cosigner is on the hook if the student can't pay. If you don't want to be responsible paying for the loan if your student can't - or just won't - you shouldn't cosign. Regardless of any personal agreements you have with the student, your credit will be affected if you don't pay. If the loan defaults, you will suffer the consequences as much as the student, including being sent to collections, being sued, or even having your wages garnished.
Students should think about return on investment when it comes to college borrowing. For example, the average restaurant cook in Rhode Island makes about $19,000 after graduation. Based on this, this student should borrow no more $17,000 for all years of education. Of course, borrowing less is always preferred! However, a computer programmer is expected to make about $47,500 in Rhode Island after graduation, which would support a higher monthly payment. A student pursuing this career should borrow no more than about $42,500 for all years of education. Use RISLA's How Much Can I Afford to Borrow calculator to estimate your starting salary and maximum borrowing amount.
5. Cashing out your retirement account.
You've worked years - maybe decades - to save up for retirement. And now that your kids are going to college, retirement isn't all that far away.Cashing out your retirement plan early will cost you a penalty, plus put you in a position where you are going to have to work longer. If you are considering this, you may want to rethink your strategy.
Get all the information you need to know about borrowing for college by downloading our free Guide to College Borrowing.