Creating financial plan helps when borrowing for college

Some tips for being in best position to finance education.

We all know college is expensive, but most families don’t understand true costs until senior year. This is when parents realize their college savings plan, if they have one, won’t be enough.

However, if you haven’t watched your financial footprint, you might not be well-positioned for optimal borrowing. Assessing your financial house before senior year helps you create a plan and may uncover cash to put aside.

Students should always borrow first

Before you borrow, your student should take available federal direct student loans (a.k.a. Stafford). These loans impose a limit of $31,000 over five years to protect undergraduate students from exorbitant debt burden. Student borrowing also protects parents.

Parents shouldn’t overborrow

If student loans don’t go far enough - they often don’t - parents can borrow, too. Typical parent borrowing includes taking a federal Parent PLUS loan, co-signing a private student loan, or tapping home equity. Top credit scores (usually 750 or higher) qualify borrowers for low interest rates, says Tim Hewitt, Pennsylvania-based senior financial adviser with Wiley Group. “That means thousands of dollars saved simply because you manage your credit well,” he says. Families can also tap retirement accounts. But overborrowing or drawing down retirement funds can be dangerous.

Steps to repair credit

For a good credit score and access to low interest rates, paying bills on time is key and paying the required minimum is imperative, though paying more or in full is best, says Leah Ingram, author of a new book, The Complete Guide to Paying for College. Your “credit utilization” ratio also affects credit score. Poorly managed credit cards can do real damage.

To monitor credit history, finance experts advise ordering credit reports from all three credit reporting agencies - Experian, Equifax and TransUnion - to scour for late or unpaid bills and mistakes, which take time to fix or dispute. Initially, getting all three at once to compare them is best, says Rod Griffin, Experian’s director of public education. You’re entitled to a free report from each agency once a year (order at annualcreditreport.com). After that, reports cost $12.50, but free options exist.

Late payments remain on reports for seven years from the original delinquency date but may not be a big factor.

Several ways to borrow

Federal Parent PLUS loans are quite accessible. They can sink you for the same reason. With a fixed interest rate of 7 percent, they help people with mediocre credit scores, and they offer protections, including graduated or extended repayment and dischargement if the parent or student dies. They also include a hefty 4.264 percent origination fee.

The key is to assess finances before that first tuition bill. College is a huge expense, so consider consulting a fee-based financial adviser who understands college. Also, Ingram recommends, begin amassing money a year ahead of bills, however you intend to pay.