Paying for College

May 1, 2019 | by stephanie hobby

As parents, we want to give our children the best start in life, beginning with stocking the nursery with top-notch toys and books, to starting them off right in early adulthood. For many, that includes helping to pay for higher education, which can be staggering.

Currently, more than 44 million Americans are paying off a collective $1.5 trillion in student loan debt. The average loan amount is $40,000, so depending on the field of study, and how much student debt is accumulated, that could mean the student is paying on those loans when their own children are ready for college, and for some, even into retirement.

Whether your child will be attending private school or publicly funded state school, the cost of higher education is rising, outpacing inflation. By partnering with your child and planning early, much of that debt burden can be eased, if not eliminated altogether.

Start by engaging your child very young. Whenever they receive birthday money or other funds, deposit them in an account set aside for college. When the child earns an allowance, encourage them to contribute, and in their teenage years, help them find part-time employment to contribute even more. These skills also teach valuable money-management skills and help your child take ownership of their college education.

Earlier starts mean you can take advantage of compound interest, which adds up quickly. Edward Jones financial advisor Ryan Sauther points out that by saving $200 per month starting at birth, that account - at 7% interest - would be worth $86,144 at age 18. If you wait until age 7 to start saving, that same account would be worth $44,939 when it’s time to graduate high school. 

But don't despair if college is looming in the near future and you haven't saved enough. There are still plenty of ways around arduous loans. Scholarships are an outstanding option because they don't have to be paid back, and there are a wide variety of awards out there. Check with your employer; some organizations offer scholarships for employees' children. Early in high school, have your student start compiling a list of scholarships for which they might be eligible. Sites like myscholly.com and scholarships.com can help with securing thousands of dollars in scholarships.

Start a calendar to keep track of scholarship deadlines and eligibility; one financial radio host recommended that students with no savings apply for 1,000 scholarships over the course of high school. While it is time-consuming, winning even a few of those awards could pay huge dividends, and help minimize future debts. Additionally, encourage students to pursue high school courses that offer college credits, which can save thousands of dollars.

Financial advisors encourage parents to use saving and paying for college as the first major money management lesson in adulthood. If it’s possible to graduate in four years instead of five, encourage students to do so, and save tens of thousands of dollars, rather than taking lighter course loads.

Another option is to attend a community college or more affordable in-state school for the first two years; once your student has selected a major, they can find a specialized college to finish their education.

Finally, make sure your student looks for work on campus. Plenty of schools offer tuition remission through work-study programs, and many graduate degrees can be obtained for free by agreeing to work as research assistants or teaching assistants.

While many of these options are time-consuming, the benefit of helping your child avoid the crushing burden of student loan debt is well worth it. 

Navigating college savings plans

Sauther says there are many ways to save. One popular option is the 529 college savings plan. It can be opened by an adult, usually a parent or grandparent, and remains under their control, regardless of the beneficiary’s age, which is a nice option for those who feel their college student isn’t ready to handle the responsibility of such a large account.

Anyone, not just the owner of the account, can contribute to the 529 plan for the child, and the funds are later used for education. The contributions grow tax free, and the beneficiary can be changed between siblings or other family members.

"Montana taxpayers are entitled to a $3,000 deduction to their gross income per taxpayer, or $6,000 for those married and filing jointly," Sauther says.

The catch is that the funds must be used for education. If it’s not, the growth will be taxed at the owner’s ordinary income rate, plus an additional 10% penalty on the growth. So, if you aren’t confident that your student will continue on to college, it might be best to look at other options, such as savings accounts, or a single or joint account through a brokerage firm. “These options provide the owner with more flexibility, as these accounts are not specific to education savings,” says Sauther. "However, the tax deduction and the tax-free growth are only available through the 529 plan."

The child’s age might dictate how the money is invested too. Since a baby has more time to ride out market changes, Sauther advises investing in more growth-oriented vehicles. Older teenagers should invest in more predictable vehicles since they will need the money sooner and may not have time to recover from a down market. 

One question Sauther is routinely asked is if a student earns a full-ride scholarship, what happens to their 529 plan? There are still plenty of education expenses; books, lab fees, room and board, computers, etc. Indeed, Sauther notes, “I have yet to have a client be upset that they saved too much for college." 

Originally printed in the May 2019 issue of Simply Family Magazine

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