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Financial Tips for Parents Regarding College Loans
For those of you who are parents, it’s understandable that you want to help your child avoid the plague of student loan debt, but there’s a right way to go about doing it and a wrong way. The wrong way is to completely sacrifice your financial future, forgoing retirement savings and just “hoping for the best” when you’re in your Golden Years. The right way is to approach college with some smart financial planning. Take these tips to reduce the student loan burden that you – and your kid – will face later in life.
Tip #1: Save for College as Early as Possible
You already know how expensive college is right now. But what about the future? Well: the annual price tag for a public school is estimated to swell to more than $35,000 in the year 2017, and an incredible $86,000 for an Ivy League school. Unfortunately, 31% of parents who plan to help pay for college haven’t started saving yet. Start socking away as much as you can now to decrease the need for loans in the future.
Tip #2: Open a 529 Plan
A 529 college savings plan is the best thing going when it comes to saving for your child’s college education. Available in every state in the country, a 529 plan is portable and can be used at any qualifying institution of higher learning in America. It’s a great way to sock away tens of thousands of dollars annually for higher educational expenses, because money in a 529 plan grows tax-free if it’s used for college costs. Many states even give you a tax deduction for contributing to a 529. Best of all: these plans are maintained in your (or the donor’s) name, so they don’t reduce your child’s chances for receiving financial aid. For more info on 529 plans, visit www.savingforcollege.com.
Tip #3: Plan for Some Aid
Unless you can truly afford it without changing your whole lifestyle, strike a balance between trying to fund your kids’ college account, and planning to get some need-based aid. There’s no rule that says you have to foot your son or daughter’s entire college tuition bills, plus pay for all his or her living expenses and other needs.
Apply for aid, but don’t over-estimate how much your child will get. Although 72% of parents think their kids could get merit aid, the reality is that only 28% of students currently do. Your child’s financial aid package will be based on your income and assets, the cost of the school, and whether you have other children in college. Take your entire situation into account when you’re thinking about aid. Do you have more kids or other family members who’ll need money for school or other reasons? Also be mindful of your own income picture – not to mention rising health care costs, current bills, and the need to save for your own retirement.
Tip #4: Impose a Spending Cap
It’s very easy to lose track of money spent on college. You can write a check here or there for living expenses, allow your child to take money out of your account, pay his or her credit card, and send in tuition payments to school – and before you know it you’ve spent many thousands of dollars. There is a better strategy.
Sit down and talk with your son or daughter and set a budget. Explain what is financially feasible and possible for you to do – and what isn’t. If all you can afford to give (or take out in loans) is, say $5,000 or $10,000 a year, then put that number on the table as your limit, then stick to it. For some advice on how much debt you can realistically manage, go to a financial planner who specializes in college financing. You can get a referral from www.niccp.com. Alternatively, any number of college financing calculators that are available online, such as the one at FinAid (www.finaid.org/ calculators).
Tip #5: Don’t Skip Your Retirement Savings
Experts from the National Institute of Certified College Planners agree with me that you shouldn’t sacrifice your retirement to pay for or borrow money for your child’s education. Think about it this way: Little Johnny might be able to borrow for college, but who’s going to loan you money for your retirement? I know this may seem like tough love, but it’s foolish to put yourself in the hole financially in ways that make it almost impossible for you to recover. Unfortunately, many parents do exactly that. I know it’s out of love for your kids. I would do most anything for my kids too. But some of the things we do as parents really don’t serve our children’s best interest, or our own long-term well being. Check out these findings from Alliance Bernstein, which surveyed parents about their children in college:
- 66% of parents say they will have to delay retirement because they’ve helped put their kids through college
- 59% are working or plan to work second jobs to help pay for their children’s college education
- 47% of parents took out a second mortgage to pay for tuition
- 33% of parents have had an adult child return home after graduating from college
Again, it’s no sin to help your child succeed – and education is one way to do so. It is a travesty, however, when you get sent to the poorhouse in the process.
Tip #6: Allow Your Child to Borrow First
This is a more cost-effective way to take on college debt, since federal Stafford Loans stand at a maximum interest rate of 6.8% for students, but PLUS loans (Parent Loans for University Students), which are made to parents, carry an 8.5% interest rate.
Tip #7: Use College Saver Programs like Upromise.com and Littlegrad.com
When you enroll in these programs, a small portion of the money you spend on everyday things – like gas for your car, clothes purchases or entertainment – gets funneled into a savings account for your child. Heck, if you were going to spend the money anyway, you might as well get a little rebate for that spending, which can help pay down college expenses.
Hopefully, these tips will help you and other well-intentioned, good-hearted parents like Christy Hammer, who recently wrote to me, saying: “My husband and I have five sons. In only nine short years, our oldest will be heading off to college, with the others following close behind. My husband and I both have student loan debt, and we’ve been taking forbearances because of our other obligations. Our main goal is to be completely out of debt before our oldest son begins attending college. At the present time, it seems unreachable to do so. We have two car loans and some consumer debt, but our major debt is our student loans. We also still rent a home because we don’t feel that we can afford to purchase one right now, nor do we have a down payment. We still have hopes and dreams of how we want our financial and families future to be, and I’m hoping … to reach our goals of being out of debt, owing our own home, and sending our children to college. Our parents didn’t help us with college, and we want our kids to graduate from college debt free.”
All parents understandably want a better life for their children, both in terms of their personal happiness and their financial security. Following the steps I’ve outlined above will go a long way toward helping you and your kids become debt free.
Next – Day 31: Address on Other Money Woes, Credit Issues, or Special Financial Circumstances (Part 7)
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