The average American college student graduates with nearly $30,000 in student loan debt, according to the U.S. News and World Report, and one in seven students defaults on his or her student loan within three years of graduation. The total amount of student debt in the U.S. tops $1.2 trillion. The cost of higher education and a decrease in public funding for colleges combined have become difficult burdens for new graduates.
If you’re one of those new or soon-to-be graduates, you’re probably feeling the pressure of your mounting student loans. If your parents didn’t have a plan to pay for your college, and you’re carrying most of the financial burden, you might feel some resentment toward them for not better preparing for your future. You can’t change today’s circumstances, but you can make sure that you don’t place similar burdens on your children. It’s never too early to learn about ways to save for a college education.
Why College Matters
When you’re having a hard time finding a job and looking at thousands of dollars in student loan debt, it’s easy to wonder whether a college education is worth it. Studies show that by the time they retire, most people actually pay a negative $500,000 for college tuition because of the way college increases their lifetime earnings. Just getting a bachelor’s degree — even a general humanities bachelor’s degree — can mean an average paycheck of $45,000 per year compared to $30,000 for an associate degree and $28,000 for a high school diploma.
You can find many types of student aid for getting bachelor’s degrees, including grants and PLUS loans, and you can also research scholarships on sites like Big Future, a scholarship search engine created by The College Board. You can also opt for online education and get a bachelor degree in Arts in Humanities, for example, which is only $250 per credit. In addition, save money to cover what scholarships and free student aid can’t cover. Don’t leave the money in a savings account to languish. Choose something that helps your money to grow.
Savings Plans That Are Better Than Bank Accounts
529 plans allow parents to set aside money for their kids’ college funds. Then, the plan invests the money in stocks, bonds, and other investment vehicles. Parents can choose plans based on their investment styles; for example, an investor who can tolerate a lot of risk might choose plans with a high ratio of stocks while a more conservative investor might choose a plan with safer, less volatile investments.
Instead of sitting in a bank account and earning less than one percent interest, your kids’ college money compounds over time. All returns get re-invested back into your plan, which gives your college fund even more earning power.
When the time comes to pay for college, 529 contributions count as parental assets, which means that less than six percent of their value counts against your child’s financial aid’s eligibility. Best of all, your cash grows tax-free, and it’s tax-free when you withdraw it as long as it’s used for education expenses.
Coverdell plans, also known as Education IRAs, might be right for you if you think your child might attend private school before heading for college. They’re also good for people who want a wider range of investment opportunities than those offered by 529 plans. You can contribute as much as $2,000 per year to a Coverdell Plan, and you can withdraw the money to pay for private school and to cover extraneous education expenses, like a new computer. Parents with combined incomes of up to $220,000 (or individual parents with incomes of up to $110,000) are eligible to place money in Coverdell accounts.
Prepaid tuition plans, which are a specific type of 529 plan, are going out of fashion. However, some states still allow parents to use them to lock in tuition at today’s rates. Some states limit their prepaid tuition plans to in-state public colleges, and the country’s lone Private College 529 Plan only covers 270 schools. In most cases, 529s and Coverdells are better choices for college savings.
Smart Saving Can Avoid Student Loan Debt
You can deduct 529 contributions on many state tax returns. Max out your 529 contributions to get the tax benefit and put the rest in a Coverdell account. Open these accounts when your kids are babies. You’ll be making a great investment in their futures.
By being smart about saving, you can avoid student loan debt after college.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.