College costs have increased rapidly over the past decade, in part due to diminishing state funding and a high demand for a college education. And for about a quarter of students, the high costs don’t result in significantly higher earnings. However, college is still an overwhelmingly good investment for most people. The return to college is about 14 percent, a better return than most other investment vehicles. And overall, college graduates make about 85 percent more in mean earnings than high school graduates.
Whether or not college pays off for your child will depend on several factors, including their choice of degree and school and where they work and live after graduation. But there are ways you can reduce the cost of college overall, and your child’s debt burden, with proper financial planning. Saving early and reducing your child’s reliance on student loans will give them a better chance of getting the most value out of their college degree.
Estimate Your Costs
It can be difficult to determine how much your child’s education will cost, since it’s impossible to predict how quickly tuition will rise or what your child’s choice of school will be. But if you can estimate a range, you’ll be able to set a goal for your savings. The College Board has a college cost calculator you can use to calculate the approximate cost of your child’s degree.
Start Saving Early
The more you save, the more you can avoid borrowing, and the less you’ll pay in interest. And if you park your savings in a tax-advantaged savings vehicle like a 529 plan or Coverdell Education Savings Account (ESA), your money will have the opportunity to grow. That’s why saving early is one of the best ways to reduce the cost of college for your family.
529 Plan
529 plans are tax-advantaged savings plans typically sponsored by states or state agencies. There are two types of 529 plans, and both provide attractive tax benefits without contribution limits. Contributions can typically be deducted from your state income tax, your money will grow tax-free, and you don’t have to pay federal income tax on the withdrawals. What’s more, your 529 plan will have a much less significant effect on your financial aid eligibility than other assets, though it will impact the amount of need-based aid your child receives. Should your child decide not to go to college, you can transfer the money to another beneficiary.
Prepaid Tuition Plans
With a prepaid tuition plan, you can buy future credits at certain colleges and universities in today’s dollars. But there are some drawbacks:
- Prepaid tuition plans won’t help with room and board at colleges and universities or tuition for private elementary and secondary schools
- Some prepaid plans are not guaranteed by states, which could put you at risk of losing your money
- There are usually residency requirements associated with these plans
- If your child doesn’t attend a participating college or university, you may only realize a small return on your investment
Education Savings Plans
With an education savings plan, you can make an investment that can later be used to fund your child’s educational expenses, which include tuition, room and board, and up to $10,000 per year for private elementary or secondary school. Education savings plans are sponsored by state governments but are not guaranteed.
Every 529 plan comes with restrictions, and fees vary depending on the plan, so it’s important to read the fine print and understand the costs, how the money is invested, and how the funds can be used.
Coverdell ESA
With a Coverdell ESA, you can contribute up to $2,000 per year for a child under the age of 18 provided that you don’t earn above the income limits for the year. $2,000 is the maximum that can be contributed each year across all accounts for each child. Contributions need to be made in cash and are not deductible. However, distributions are not subject to income tax, provided they don’t surpass your child’s educational expenses. Your child must use the money by age 30 unless they have special needs. Otherwise, they’ll pay taxes and penalties.
Roth IRA
A Roth IRA is designed for retirement savings, but it can also be used to pay for college expenses, and is an especially appealing option for older parents. That’s because once you reach age 59 ½, assuming it’s been at least five years since you started contributing, you’ll be able to withdraw your entire balance tax-free to help your child with their tuition costs. Before that age, you’ll be able to withdraw only your contributions without paying income tax.
You can contribute up to $6,000 per year or $7,000 if you’re age 50 or over. If you don’t use the funds to pay for your child’s educational expenses, you can leave it in your account for retirement. Conversely, if you do withdraw funds, it’ll reduce your retirement savings. If you’re going to use a Roth IRA to save for college, it’s best if you also have access to another retirement savings vehicle like a 401(k) plan.
Select the Right School
Your child’s choice of degree program and choice of institution will both impact the return on your investment. Many student loan borrowers thrive, even with high levels of debt, because they graduate from programs that result in high earnings. For example, professional degrees in nursing and pharmacy yield high earnings yield high earnings relative to the level of debt. And MBA graduates are similarly equipped to repay their debt.
On the other hand, students who earn associate’s or bachelor’s degrees in the liberal arts or sciences earn less in their first year than the median income for a high school graduate. Using the Department of Education’s College Scorecard to search for programs can help you identify which degrees will be the most lucrative.
You should also urge your child to avoid for-profit schools, which are known to funnel tuition money towards marketing rather than instruction. Graduates of for-profit colleges spend more on tuition than they would at public universities or community colleges, but their earnings after graduation are less.
In addition, while your child may have their dream school in mind, you should have a realistic discussion about the costs, and encourage your child to also apply to schools they are overqualified for. This will likely result in more offered aid.
Help Your Child Apply for Financial Aid
Once your child is ready to apply for college, you’ll need to complete the FAFSA form by the deadline for your state. The form will ask for information about both you and your child if your child is considered a dependent, so you should fill out the form together. Have all your required documents prepared so that the process will go smoothly.
Once you review and submit the form, you’ll receive an offer for aid. You’ll need to select the loans, scholarships, and grants you want and respond to the offer. The financial aid office at the school your child attends will apply your aid and send you the remaining balance.
Take Advantage of Merit Scholarships
When accepting aid, you’ll first want to pay for as much of your child’s education as possible with scholarships and grants, which don’t need to be repaid. Merit scholarships are offered based on a student’s academic performance. You may get an offer for a merit scholarship from some of the schools your child applies to, and you should factor those in when helping your child decide which school to attend.
Some private organizations also offer merit scholarships, so you should research both top nationwide scholarships and local programs. Your child doesn’t need to apply for everything you find. Narrow down the list based on their eligibility and find scholarships that are a good match for your child’s interest and skills. For example, if your child is a strong writer, they may want to enter the Atlas Shrugged Essay Contest.
Apply for Grants
You may get offers for need-based grants from your FAFSA application, which you should always accept, since they don’t need to be repaid. But you can also apply for merit-based grants from the state. Check your state’s government website for details.
Utilize Work-Study Programs
If your child’s school participates in the Federal Work-Study Program and you qualify based on need, your child may be able to accept a part-time job in exchange for money for educational expenses. As long as your child feels confident about balancing a part-time job with studying, these programs may be preferable to loans, which need to be repaid with interest.
Borrow Money
Federal Direct Subsidized Loans
These loans are available to students with financial need, and have the best terms of the available borrowing methods. They currently come with a low 2.75 percent interest rate, and the U.S. Department of Education pays the interest while the student is attending college at least half time, six months after graduation, and during any period of deferment.
Federal Direct Unsubsidized Loans
There isn’t a requirement to prove financial need for these loans. They’re available to all undergraduate and graduate students, and the interest rate is the same as it is for subsidized loans. However, students are responsible for paying the interest during all periods. The student can choose to allow interest to accrue until repayment six months after graduation, but they’ll end up owing more in the long run.
Federal Direct PLUS Loans
PLUS loans are designed for parents and graduate students. You can use a Parent PLUS loan to help your child pay for school. However, you may not be eligible if you have bad credit, unless you can prove extenuating circumstances or get an endorser who agrees to repay the loan if you default. Additionally, Parent PLUS loans come with much higher interest rates than the Direct Subsidized and Unsubsidized loans. However, they may be lower than with private student loans. You can also request deferment, which means you wouldn’t have to pay back the loan until six months after your child graduates, as long as they remain in school at least half time.
Private Student Loans
APRs on private student loans are typically higher than with other forms of borrowing. However, if you have excellent credit, which is considered a FICO credit score of at least 800, it’s possible to get a private loan with a better rate than the Parent PLUS loan, so compare your options. These loans also give you the option to either cosign with your child or borrow in their name, and you can choose a loan term shorter than 10 years to save money on interest. In most cases, however, people with poor credit will find that Parent PLUS loans are a better deal.
Plan for Repayment
Sit down with your child and go over the monthly payments they’ll need to budget for after graduation. Look at average salaries for different jobs your child could get with their choice of degree to give them a realistic idea of what their budget might look like.
Explore Student Loan Forgiveness Programs
With student loan forgiveness programs, you can have a portion of your debt completely wiped away. There are programs available for the following:
- Teachers working in a school that serves low-income students
- Healthcare workers in high-need areas
- Lawyers working in the public sector
- Nonprofit and government employees
- Students who complete at least one year of service with Americorps
If your child is worried about their student debt burden, encourage them to consider jobs that would make them eligible for these programs. Discussing repayment with your child now may help them make the right decisions about future employment.
The information contained herein is provided for free and is to be used for educational and informational purposes only. Consult a financial professional for specific help with your situation.