As has been widely documented, college costs are punitively high. Worse yet, the government and universities show no signs of wanting to address this issue.
That is to say higher education is increasingly burdensome for families below the loftiest tax brackets and loans are increasingly necessary, even for those with six-figure salaries. On the college loan front, borrowers’ options aren’t great. There’s Uncle Sam and private lenders, including traditional banks.
Problem is the federal government doesn’t extend college loans to everyone that applies. Knowing this, a standard money center bank that makes such loans is likely to subject borrowers to higher interest rates in the name of filling a void.
There’s a two-fold silver lining here. First, there are other avenues to consider when it comes to paying for college. Second, a couple of the primary alternatives represent excellent opportunities for advisors to help families strategize for paying for higher education.
College Costs Talking Points for Advisors
Chances are advisors have at least a few clients with more than one college-aged child, meaning they’re facing the specter of two (or more) kids in college at the same time. That has implications when it comes to traditional loans.
Homeroom, the official blog of the Department of Education, points out two or more children from the same family in college at the same time can affect borrowers’ ability to procure need-based aid. As a result, exploring the myriad scholarship opportunities out there is a pertinent strategy.
“There are also thousands of scholarships students can apply for that are not need-based. In fact, 73% of all families used scholarships to pay some college costs in 2022-2023, according to Sallie Mae’s 2022 How America Pays for College study,” notes Morgan Stanley.
In terms of other college financing options advisors can discuss with clients, cash-out refinances are an idea.
“Cash-out refinances have one big drawback for financing college: You get all the money up front, and must pay interest on it from day one, even though you won't need to pay for four years of college all at once,” adds Morgan Stanley.
In some cases, the client may have already paid of their mortgage so the specter of another 15- to 30-year commitment isn’t attractive. On the other hand, many clients with college-aged children are still paying a mortgage so leveraging their house to pay for college amounts to no more than a second monthly obligation – the exact same place they’d be with traditional college loans.
Cash-out refinances for college tuition isn’t for everyone. Nor are securities based loans (SBLs), but for some clients, these loans have merit when it comes to paying for higher education.
SBLs are easy to convey to clients – the instruments are tied to investable assets, such as stocks and bonds, already held by the client. An important point to tell clients: Many SBL issuers will take dividends or bond coupon payments from the leveraged securities over the life of the loan. There are, however, benefits.
“SBL borrowers also enjoy payment flexibility. For instance, borrowers may be able to choose to start with interest-only payments and pay off the loan principal after the child finishes college, or tie their principal payments to cash flow events such as bonuses. Borrowers of course should carefully consider the costs involved with loans; for example, some SBLs require a prepayment fee to pay off principal early,” concludes Morgan Stanley.
Additionally, because SBLs are tied to tangible assets, a borrower’s creditworthiness isn’t integral and the loans typically don’t appear on Equifax, Experian and TransUnion reports.
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