If you’re a parent who has always dreamed of sending your child to college someday, you’re probably well aware that tuition costs have increased pretty drastically over the past 20 years.
According to data reported in an annual survey for U.S. News & World Report, the average cost of tuition and fees for the 2019 to 2020 school year was $41,426 at private colleges, $11,260 for state residents at public colleges and $27,120 for out-of-state students at state schools.
Those are daunting numbers for some — and yet university enrollment is expected to continue rising through the next decade, which means it’s unlikely U.S. tuition prices will go down.
So what can you do now to prepare for this looming expense? Here are a few ways you can help your child pay for college:
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1. Starting early with a savings plan
You can go with something as simple as a savings account to which both you and your child can contribute regularly, or you could open a tax-advantaged 529 savings plan and invest that money.
Much like a Roth IRA, 529 plan contributions are post-tax (although some states do offer income tax deductions or tax credits for contributions); but when you withdraw the money and use it for qualified education expenses for a designated beneficiary, the earnings are tax-free.
Because it’s tied to the market, a 529 plan does come with some risk, so you may want to discuss this option with a tax professional and/or financial planner. They can also answer any additional questions you may have about the different types of 529 plans that are available.
A Coverdell Education Savings Account is another tax-advantaged investment account worth exploring. Like the 529 plan, the money in the account grows tax-deferred, and when it’s used for qualifying expenses, it can be withdrawn tax-free. Unlike the 529, however, there are income limitations for a Coverdell account.
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2. Look for ways to get free money
The resources are out there, you just have to know where to find them. One good idea is to begin by filling out the Free Application for Federal Student Aid (FAFSA®) together with your child.
Or, if you aren’t quite there yet, you may be interested in checking out the FAFSA4caster to get a free early look at your child’s eligibility for federal aid, including an estimated Federal Pell Grant amount (if any) and Federal Work-Study amount (based on the average nationally).
It’s generally recommended that parents and their children investigate the many types of scholarships available. Scholarships aren’t just for athletes and academic stars; there are acting, dancing, and other area-of-interest scholarships. There are also civic scholarships, scholarships for those with certain diseases and disabilities and even fly-fishing scholarships.
Your child also can check out the high school guidance department for any information, and you may want to make an appointment with a school counselor to get any tips that might help your search.
If your son or daughter already has a college selected, funding information is usually available on that school’s website, as well.
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3. Encourage your child to get a manageable job
You and your buddies who had jobs in college could probably debate for hours the pros and cons of asking kids to work their way through college.
Yes, it’s a time suck, but it can help with organizational skills; it can provide a real-world view of what it’s like to juggle employment and other responsibilities; and federal education data show that students who work part-time, up to 12 hours a week, get better grades than those who don’t work at all.
But here’s the true bottom line: Student loan debt is now the second-highest consumer debt category — behind only mortgage debt, and higher on the list than both credit cards and auto loans.
A job won’t pay for everything, but it will pay for some things, and that means fewer costs for you to pick up now or for your child to pick up later.
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4. Researching student loan options
With the high cost of getting a degree these days, it’s unlikely you and your child will be able to avoid taking on at least some student loan debt. Taking some time to research all the student loan options out there — federal and private — and how they work could be helpful in understanding which options work best.
The amount a student can borrow in federal loans will depend on his or her year in school, status as dependent or independent and the type of loan or loans obtained.
Parents of dependent undergraduate students also can apply for Direct PLUS Loans to help pay for education expenses that aren’t covered by other federal financial aid.
Federal student loans usually have more benefits than loans from banks or other private lenders, so be sure to compare the benefits of each private student loan program, as well as the interest rates and the length of the loans available.
For example, federal loans offer deferment and forbearance along with programs like Public Service Loan Forgiveness (PSLF) and multiple income-driven repayment plans when the time comes. Private lenders don’t usually offer such perks and protections.
While researching different options for private student loans, you may encounter different ways for you and your child to apply, such as taking on a private student loan yourself or giving some thought to whether you’re willing to act as a cosigner for a private student loan.
There are, of course, pros and cons to both of those options, so it’s important to do your due diligence on the private lenders you may be considering. What benefits do they offer? What are their rates and terms? Is there any fine print?
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What happens if you can’t qualify for student aid?
If your child doesn’t qualify for enough federal student aid to cover the cost of attending college, private student loans may be a viable option to look into to close the gap.
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