The cost of a college education has exploded to the point where using student loan debt to pay at least part of the cost has practically become a given. But even if student loan debt is a default choice, it’s still one that is best avoided or at least minimized.
Hundreds of thousands of young people are graduating college carrying tens of thousands of dollars in student loan debt, and more than a few are in the six-figure range.
Even if your child has an in-demand degree from a top university, this kind of financial burden could be starting him or her out in life with a huge disadvantage.
You can keep student loan debt to a minimum — or even eliminate it completely — by taking action well before they reach college age. And when they do reach that age, there are few things you can do even then that will make a difference.
Here are a few suggestions that you can use to minimize or eliminate the amount of student loan debt that your child will need in order to get a college education.
Apply for Financial Aid
The U.S. Department of Education provides $150 billion in financial aid of various types to more than 15 million students each year. Your child(ren) could be among them.
Two programs to look for specifically include grants (aid that does not need to be repaid), and work-study, which is exactly what the name implies.
The federal work-study program is particularly interesting. It is set up with the college or university and involves either community service or work related to the student’s course of study. The money earned is contributed to school related expenses.
Beyond federal government financial aid programs, check with the state where you live to see what programs they have available. You can also see if the college your child will attend offers any financial aid, or if there are any plans available through private organizations or non-profit entities.
For more information on financial aid, check out the U.S. Department of Education’s Federal Student Aid website.
At my daughter’s high school graduation this past spring it was revealed at the ceremony that about half the graduating class had a scholarship of one kind or another. Never assume that your child has to be a top student or top athlete in order to get a scholarship.
There are partial scholarships in addition to the full ones, and they cover a host of qualifiers, including:
- Academic scholarships
- Athletic scholarships – even and especially for sports other than the Big Two (football and basketball)
- Average student scholarships – This one is interesting; Google “average student scholarships” if you don’t believe me
- Community service scholarships
- Scholarships for minorities
- Scholarships for women
- Unusual scholarships, such as those based on ethnicity, hobbies or business interests
As your child gets closer to college, pull out all the stops and apply for any type of scholarship you can. There’s practically one for everything you can think of, so there may be one for your child. Even if it isn’t the coveted “full ride” scholarship, it will still help reduce your reliance on student loan debt.
Make Use of 529 College Plans
You can think of these as Roth IRA plans for the purpose of paying for your children’s college education. Much like a Roth, the contributions are not tax deductible, but investment earnings within the plan accumulate on a tax-deferred basis. And as long as the funds are withdrawn to pay for qualified education expenses, there will be no income tax on those withdrawals.
Here are the highlights of the 529 College plan:
- There are no income limits restricting your contributions.
- You can contribute up to $14,000 if you are single, or $28,000 if you are married filing joint; you can actually exceed these limits, but there will be gift tax consequences if you do.
- Under a special election, you can invest up to $70,000 ($140,000 for married couples) at one time by accelerating five years worth of contributions. This will enable you to escape gift tax consequences.
- Contributions terminate when the account value reaches $350,000.
- There is no age limit for the plan beneficiary.
- Funds can only be used to pay for qualified education expenses at accredited schools, whether public or private. The earnings portion of unrelated distributions are taxable.
- The funds must be held in a plan managed by state approved investment companies. You can change your portfolio selection once every 12 months, and there is no self-directed investment option available.
And once again like a Roth IRA, the sooner you begin funding a 529 College plan, the more money you’ll be able to accumulate with it.
Spend the First Two Years at a Community College
For example, tuition, fees, room and board at Rutgers University in New Jersey is $25,077 per year for an in-state resident. Over four years, that’s $100,308.
However, tuition and fees at the County College of Morris in New Jersey is about $4,330 per year for county residents. It’s a two year program, and the total cost will be $8,660 to cover freshman and sophomore years.
If your child spends their first two years at the community college, then transfers to Rutgers, the total cost of a four year degree will fall to $58,814 (Rutgers $100,308 divided by 2, plus $8,660 for two years at the county college). That will reduce the cost of a four year education at Rutgers University by $41,494.
As in $41,494 that you won’t need to use student loans to cover.
Train Your Kids to Contribute to Their Education
There are several advantages for doing this, beyond the obvious fact that any money your child can contribute will reduce the amount you need to borrow:
- A child who pays for at least part of their college costs is very likely to be a more serious student — having “skin in the game” is an excellent motivator.
- If a child has to pay part of the cost — especially a percentage — he or she may lean toward a school that’s more reasonable in price.
- More money paid toward school may limit the amount paid for extracurricular activities, like travel and entertainment.
- Paying for part of their education is likely to foster a sense of responsibility that won’t come if your child has no financial contribution.
College costs have moved well above the ability of the average family to afford it. Given that reality, all methods of financial contribution need to be on the table — especially if you have more than one college bound child.
You may not be able to eliminate student loan debt completely, but you owe it to yourself and your children to keep them to an absolute minimum.