college

When to use college savings, student loans?

Don TaylorDear Dr. Don,
My daughter is heading off to school in the fall and has enough college savings in her account -- $70,000 -- to pay for two years of college costs, without student loans. Should this money be used first and then we, her parents, take out loans for the final two years? She also is looking to continue her education by enrolling in a master's program after completing her undergraduate degree.

Thanks,
-- Steve Scholar

Dear Steve,
I don't know how realistic it is for your daughter to receive financial aid. If she submits a Free Application for Federal Student Aid, FAFSA, it will determine the amount of student aid available to her while expecting her to contribute part of her college savings toward her school costs. The expected contribution from her savings will be at a lower rate if her money has been held in a Section 529 college savings plan.

Spending down the saved-up money in the early years of her undergraduate education has a twin benefit. She won't need student loans right away, and she'll improve her odds of qualifying for financial aid in her junior and senior years.

If receiving student aid isn't realistic because of your income levels, then consider the annual limits on the federal direct student loan program. Decide whether it makes sense to spread the $70,000 out over her college years, so there's more total loan availability.

Don't be so quick to jump in with applying for parental loans. Once her college savings are used up, she should apply for federal direct student loans on her own first before you start considering taking out a federal direct PLUS loan for parents. Exhaust the loan availability of the federal programs before considering private student loans. And if the loans are in her name, you can always help her out with the payments.

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