In 2009, 67% of college graduates had debt averaging $24,000. The numbers are much higher at private schools and this doesn’t take into account loans taken out by parents. Alarmingly, student loan debt is growing at an incredible rate as college costs rise faster than family income and faster than grants and scholarships. Additionally, student loans are not forgiven in bankruptcy and must be paid back. One of the worse things in the world for a new graduate is looking for a job and trying to repay a huge student loan.
So besides winning the lottery, what saving plans are available? The key is to start early. If possible, start saving when your children are still in pre-school so that your savings have time to grow.
529s: State sponsored investment accounts. The money grows tax-deferred and is tax-free when withdrawn to pay for qualified expenses. For families with multiple children, funds can be moved from one 529 to another, depending on which kid can use the money more.
Coverdell Accounts: Like the 529s, allows earnings to grow tax-deferred and is tax-free when used to pay for qualified expenses. One drawback you can only give up to $2,000 per year.
US Savings Bonds: If purchased after 1989, can be redeemed tax-free when the bond owner uses the proceeds to pay college tuition and fees. US Savings Bonds are very safe investments but tend to offer lower rates of return than either 529s or Coverdell’s.
Custodial Accounts: Are opened in the child’s name and the income is taxed at the child’s rate and not the parent’s rate.
- Start saving as early as possible. I opened 529s when my kids were six months old.
- Set up automatic deposits so you don’t have to think about it.
- Rather than giving gifts on birthdays, ask friends and relatives to contribute to your kids’ college savings plan instead.
Let me share with you my own personal example. I have two kids, seven and five years old. I opened 529’s when they received their social security number at about six months. I have automatic investments monthly from my paycheck deposited directly into the funds so I don’t have to think about it. Money earned from recycling and money earned when I cash in spare change goes to the 529’s. Currently, I have about $18,000 for my seven-year old and about $15,000 for my five-year old. It’s really not that difficult if you start early and make an effort to save.
So what do you do if you didn’t start early and your kids are already in high school? Kids can:
- Attend a junior college for two years and then transfer to a university or college.
- Attend a cheaper school closer to home.
- Work part-time.
- Research available federal, state, and local grants and apply to as many as possible. Grants do not need to be paid back and can be given based on many factors such as financial need, academic achievement, and ethnicity.