The cost of college has risen steadily and dramatically for decades, leaving many graduates with higher-than-ever levels of student loan debt. New college students and their parents are overwhelmed as the student loan crisis continues to grow.
We have some tips on saving for your children’s education that can help reduce student loan debt in the future:
Start saving early:
The sooner you start saving for your kids’ college education, the less you have to set aside. You can’t know how expensive your kids’ future education will be, but it’s a safe bet that the costs will only grow in the coming decades.
Just like retirement, it’s crucial to start saving as soon as possible, and let those savings compound over time.
Another reason to start early is that having an education fund established, and ready to go for years, gives your loved ones more opportunities to contribute. Every birthday and Christmas for years to come will be an opportunity for everyone to help your kids’ college fund grow.
Having an established fund throughout your kids’ lives will also give you plenty of time to adjust your plans and react to changing situations. Have a second child? Now you can make adjustments to ensure both kids’ have college funds established. Give yourself time to plan for anything by starting to save as early as possible.
Understand your investment options:
- Roth IRA: A Roth IRA (individual retirement account) can be used for approved education expenses if the account has been established for at least five years. There are limits to how much can be put into a Roth IRA each year, but the funds will grow tax-free (the contributions are made from post-tax income). A great advantage of the IRA is that anything not used for school can be kept for your kids’ retirement fund. Just like with saving for education, it’s never too early to start saving for retirement. More Resources: The Basics of Investing
- Coverdell Education Savings Account: If your income falls within legally required limits, you may set up a special account for your children, saving up to $2,000 per year in a tax-free savings account. The rate of return will depend on how well the account performs, and your child will have to withdraw the money by the time s/he turns 30. These accounts are more flexible than IRAs, allowing funds to be used for primary education expenses and some education supplies.
- 529 Plan: A 529 plan lets you save more money than an education savings account or IRA, and also grows tax-free over the years. The funds must be used for approved education expenses, but it may be possible to shift the fund from one child to another, or to use for non-college education expenses, like trade school. Investigate the specific terms of any 529 plan you are considering to know what these limitations are.
- UGMA, or Uniform Gift to Minors Act: This is a tax-advantaged way to transfer funds to your child, but s/he may use the money for anything, not just education expenses. As long as you’ve raised your child well, you’ll be giving them a financial head start on their education, but you won’t have as much control over how the money is used as with the other options. There are tax advantages for you when you give funds this way, but not as advantageous as a 529 plan or education savings account.
- Prepaid tuition: This is an option where you pay tuition today for your kids’ education tomorrow. The advantage is you’re paying lower rate now than what the eventual degree program will probably cost. The disadvantage is you’re committing to a particular school or system; you might have a state-wide prepaid plan that covers any one of dozens of schools in a particular state. But if you child wants to attend a college that is not in the prepaid system, you could be out of luck. You’re also not protected from unforeseen circumstances, like a collapse in the prepaid tuition fund’s value.
Make college less expensive:
A good way to make your college spending go farther is to make college less costly. The farther each dollar goes, the less you have to invest up front.
- Start at a community college. In almost every case, it matters more what school one graduates from than where s/he started. It’s much less expensive to start at a community college, get an associate’s degree, then transfer to a full four-year college for the last 2 years. At the end, the degree looks the same as someone who put in all four years at the same school and spent considerably more. This is also a better option for anyone who isn’t sure about sticking with college, or who doesn’t know what subject they intend to major in. Getting an associate’s degree doesn’t commit you to a particular major, and if you hate college and decide to drop out, you aren’t likely to be deep in student loan debt with no degree to show for it.
- Get college credit early. Many high schoolers can take Advanced Placement (AP) courses that give college credit. If your student is capable to taking these classes, it will help make college cheaper, as each college credit earned in high school is one s/he doesn’t have to pay for later. AP courses also prepare him/her for the challenge of higher education coursework.
- Apply for scholarships: depending on what your child plans to study or what activities s/he will be participating in, there may be opportunities to reduce the cost of college with grants, scholarships, and fee waivers. At the very least, you may be able to get out-of-state tuition waivers to help your child afford college in a different state. Another important thing to remember is that you don’t have to stop applying for scholarships when you get to college. Keep applying for new scholarships throughout your college years, and grab every benefit you can.
- Keep college short: if you can finish college in less than four years, you’ll cut a significant chunk off of the cost of college. Besides high school AP classes, taking courses in the summer can help you shave a semester or two off of your college schedule.
- Live at home. Sallie Mae reports that 37% of college students live at home or with family. If your kids can attend a college that is close enough to home, they can save a lot of money on housing costs by living off campus.
Invest in a rental unit:
Like the prepaid tuition option we mentioned before, this is a little bit risky; the idea is that you know where your child will be attending college someday, and you’re going to buy a rental property now for them to live in eventually. Over the years while your child works his/her way toward college, you can rent out this property to other students—in a college town, there will be no shortage of potential renters. The rent you charge should cover your mortgage payment and expenses, and when the time comes, your child will have an off-campus place to live. If the property has room, s/he can have roommates who pay rent, so you’re still earning rental income from the property. When your child graduates, you can keep renting to other students, or sell the property and recoup any equity you’ve accrued over the years.
There are big potential risks to this idea. Being a landlord involves a lot of work. You’ll be responsible for the upkeep of the property, repairs, maintenance, etc… and it’s unlikely your college student renters are going to have the inclination to take good care of your property for you. If you’re ready to assume the great responsibilities involved, owning rental property can be a way to earn income while investing in a place for your college-bound kid to live someday.
There are many ways military service can help pay for a college education. Each branch of the military offers tuition assistance for people who have served in the military and are attending college post-service. Yes, this means finishing college years later than if one didn’t enlist in the military first, but military tuition assistance can cover up to 100% of tuition expenses and isn’t a loan, but rather a benefit earned by those who successfully perform military service.
The GI bill can also supplement this tuition expense with “top up” funding, which can cover expenses not already covered. And with the GI bill, education benefits can be shared with the service member’s spouse or children. You can learn about many different education benefits from the U.S. Department of Veterans Affairs.
A different kind of military benefit is the ROTC, or Reserve Officer Training Corps,. This reverses the GI bill, in that you get college paid for first, and then you enter military service. The idea is that the ROTC program and the college education you get prepares you to be a military officer. Students considering ROTC should be aware that they could be committed to perform up to 12 years of military service after graduation.
At credit.org, we’ve always been proud supporters of our military servicemen and women, but we acknowledge that this kind of service isn’t for everyone. If your student is a good candidate, serving in the armed forces can make paying for his/her education much easier.
However you prepare for your children’s education, it’s important to start early and make it easier on yourself by paying off debt and avoiding unnecessary expenses as you save for the future. Talk to a professional debt coach, free of charge, about how you can create a budget and an action plan to be debt free. And if you’ve already got student loans, student loan counseling can help.