Student loan debt in the United States is estimated to total an astonishing $1.7 trillion. Most parents aim to help their children cope with college tuition fees but this goal is getting harder with increasing costs across the board. According to Fidelity Investments’ 2020 College Savings Indicator, although the average parent hopes to cover 65 percent of their child’s college expenses, they typically only manage to cover 33 percent of the costs.
In addition, the average college tuition cost continues to rise in both public and private schools. The average cost of tuition and fees in the 2021-2022 academic year for a public, in-state college is $10,338. The cost is $22,698 for a public, out-of-state college and $38,185 for a private institution. On-campus accommodation and meals will add another $10,000-20,000. On top of this, parents must budget for 1-2 percent inflation each year.
Therefore, parents must start saving for their child’s college education early. The sooner you start, the more compound earnings you will gain over time. There are also specific programs that make paying for college easier. Here are some of the most popular options.
529 Plans
A 529 plan is an education savings plan that uses after-tax money. Many states allow you to deduct your contributions from your income tax. Interest earned and withdrawals for education purposes are tax-free. If the account is owned by the student or their parent, students need not report any withdrawals on FAFSA, so they can continue receiving financial aid.
529 plans have several other advantages. Other people such as grandparents or family friends can set up an account for a student’s education. Certain states offer prepaid tuition plans which allow parents to purchase tuition for the future at current costs. Some plans also allow the money saved to be transferred to younger siblings if it is not used by the beneficiary.
Roth IRAs
A Roth IRA is a retirement savings account that uses after-tax money and allows account holders to earn interest tax-free. If parents already have a Roth IRA in place, they can use the same account to save for their child’s college expenses as well.
The benefit of using a Roth IRA is that parents do not have to set up a separate savings arrangement. If their child does not end up going to college, the money saved can then be put towards their retirement. Furthermore, funds in a Roth IRA can be withdrawn at any time without a specific reason and there is no early-withdrawal penalty if the funds are spent on higher education. However, taxes will have to be paid on any funds transferred to children or grandchildren.
Custodial Accounts
A custodial account— Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA)—is an investment account that acts as a trust for a minor child. Both accounts can hold assets such as cash, stocks, and mutual funds. In addition, UTMAs can hold physical assets such as real estate. Parents are essentially custodians of the account until their child reaches the age of maturity, which ranges from 18 to 21 depending on the state.
The major benefit of a custodial account is that there is no limit on the investment sum nor any limitation on where the money has to be spent. However, beneficiaries may not use the money for education after they gain rights to the account. Custodial accounts can also reduce the amount of financial aid that beneficiaries are eligible for.
Grants and Scholarships
Grants and scholarships are good ways to defray the high costs of a college education. There are a wide variety of grants and scholarships available from colleges, the government, and private and public organizations. There is an estimated $24 billion in funds from five million scholarship opportunities available to college students every year.
That said, grants and scholarships are competitive. It can be hard to win a scholarship with the large number of students applying for each opportunity. Some scholarships are split between several applicants, reducing the sum that each student receives. Students hoping to receive scholarships are advised to submit as many applications as possible throughout the year.
Federal and Private Loans
If your savings and your child’s scholarships cannot cover the full sum of their tuition expenses, consider paying for college through student loans. Parent PLUS loans are issued to parents of students, so you can shoulder the debt instead of your child. Your child may also be eligible for a subsidized federal student loan which does not accrue interest while they are still in school.
Private student loans are another option. There are many different private student loans available and it pays to be prudent when selecting one. The best private student loans should offer flexible loan terms, zero fees, a low interest rate, and a generous grace period. A private student loan should not replace financial aid but complement it.
With the high cost of education, parents can understandably be worried about the future of their children. When you start saving early, you can have your finances in order by the time your child is ready for college. Otherwise, grants, scholarships, and loans are available to help you make up the difference.
