Despite calls for America's colleges to slow down tuition increases, the cost of post-secondary education continues to rise. Published tuition and fees at private schools rose by 3.3 percent in 2018-19 over the year prior, and while average annual tuition is $35,830 (not adjusted for inflation), many schools charge far more than that, according to a report by The College Board.
With many Ivy League schools charging upwards of $60,000 a year for tuition, students and their families find themselves paying close to $400,000 in total expenses over a four-year span – and that's just for one child. As tuition and room-and-board costs climb, even high-net-worth families may find it increasingly difficult to fully fund four years of college expenses.
Those who haven't set enough money aside for education must find other ways to pay for college. In many cases it is simply a matter of timing. It might mean college expenses are funded over five years instead of four. Parents should also be mindful about not liquidating investments during periods when the market is down and having a ready line of credit, which can help make these cash-flow challenges easier to navigate.
Tap into lines of credit
One popular option for paying tuition is borrowing against established equity lines, including home equity lines of credit (HELOCs) and security based lines of credit. Both allow families to borrow cash at a typically lower interest rate, which they can then use to make tuition payments. But it should be noted, lines of credit should only be considered after exploring other financing options.
Paul DeLauro, senior vice-president and manager of wealth planning for City National Bank, says secured lines of credit can be very useful when a cash crunch is temporary – like paying for a big ticket items such as college tuition.
Angie O'Leary, head of wealth planning at RBC Wealth Management-U.S., also recommends using a HELOC or securities-backed line of credit. “The benefit is that you don't have to liquidate an asset at an inopportune time," she says. These secured lines, in particular, are useful in that the borrower can write a check against the equity, it's easy to set up and rates are typically lower than the rates on an unsecured line of credit or a standard, unsubsidised student loan These loans typically require interest payments only until you are ready to pay back the loan amount.
There are risks with using any credit facility in that if interest payments are not made the equity position in the house or investments could be at risk.
Apply for traditional loans
Just because there is family wealth, doesn't mean a child doesn't qualify for any loan assistance. Interest rates are higher on private student loans than on lines of credit, but it is another option, says DeLauro.
Many schools also offer private student loan financing, which wealthier individuals can access, adds Kal Chany, author of Paying for College Without Going Broke and founder of Campus Consultants, a company that helps students with financial aid.
Many people think the Parent PLUS loan, a federal loan program for parents of dependent undergraduate students, is income-tested, but it's not — it's credit-tested, says Chany. As long as you have good credit, you have a chance to receive a loan. Keep in mind, though, rates on these loans typically run about seven percent, which is higher than other types of credit.
If you need the money, and you don't think you qualify for a loan, try and apply anyway, says Chany. You never know what might happen. “Don't assume you're automatically not eligible," he says. “It's often not an intuitive process. Things can be quirky in the aid office."
In addition, most educational institutions offer merit-based scholarships for which anyone can apply. In some cases, you'll have to apply for financial aid and get rejected before you can apply for the merit-based award, he says.
Start saving early
Of course, the best way to pay for college is to start saving early, says Chany, adding that it's never too late to put money into a 529 Plan. When trying to save, don't forget about travel and living expenses for your student, which can add up to about half the tuition costs, adds DeLauro. “Many people only look at tuition and then find out they haven't saved enough," he says.
It's also a good idea to develop a family philosophy around college tuition, says O'Leary, especially for high net-worth individuals. Decide on who's paying — are the parents covering everything? Or should the children contribute too, necessitating they work while pursuing their higher-education period?
Understanding who will be accountable for what can influence the kind of credit used to fund a child's education. Maybe the child pays, but the parents loan them money from their equity line of credit and charge the child a lower rate. “You have to think through all the options and decide, as a family, what makes most sense," says O'Leary. “Figure out together how best to pay."
Non-deposit investment products offered through RBC Wealth Management are not FDIC insured, are not a deposit or other obligation of, or guaranteed by, a bank, and are subject to investment risks, including possible loss of the principal amount invested.