Is there any hope for my child? That may be the question you’re asking after reading our first two installments about the trend of overwhelming student loan debt and how it affects the Millennial generation. There is hope! In our final post about student loans, we discuss the options available to families to avoid the trap of crippling debt.
I’ve found my clients generally have some ability to help pay for their children’s or grandchildren’s education. The best thing someone in that position can do is to start having conversations early on about the cost of college. Those who can afford to help pay for some or all of a college education should create realistic expectations of what they will or will not pay for.
Ways to save for college
For those families that want to help pay for a portion of their children’s education, but don’t have a sense of where to begin, I recommend the simple 1/3, 1/3, 1/3 strategy as a starting point. The expectation in this scenario would be that the parents would pay for 1/3 of the cost of tuition, the student would be responsible for raising another third of the funds (perhaps with a part time job or student loans) and the final third would be covered by academic, merit or other types of scholarships or grants earned by the student. While loans may still be part of the equation, they will be much lower and more manageable than borrowing money for the full tuition.
Successful financial plans for a college education take effort on the student’s (and parent’s) part well before college begins. Keeping grades up or researching other scholarships they may qualify for will take work. Finding a part time job and saving their earnings will require discipline. Parent’s must be mindful of discussing college funding options early on and help their students create and stick to a plan.
As college nears, continue the discussion of who is going to pay for extras while in school, including books, living expenses and “fun money.” Can your student balance a job and course work while in college, or do you want them free to focus on their studies? Each family is different and even within families, each child may be different.
Your ratios may end up being different than the scenario I’ve offered, but find an amount that works for your situation by discussing the options with your student. The more you can communicate the better off you will be.
For families with a deep conviction to pay all of their student’s tuition, saving and investing early can make a substantial difference. The 529 savings plan is an investment tool that allows funds specifically for college to grow tax-free. Another strategy that some (especially young) families choose, is taking a 15 - instead of 30 - year mortgage on a home. At the end of 15 years, when their home is paid off, they now apply that payment amount toward college costs. While it’s true that lower payments on a 30 year home loan can make it easier to set aside money each month for college savings, some lack the discipline to do this. While the math may not be perfect, it is a good way to help fund college through cash flow.
Programs that help pay for college
Despite the prospect of loan repayment difficulties and college tuition costs continuing to rise, there are helpful programs emerging.
Many high schools are offering more options for earning college credits. An Associate’s Degree can be earned with a dual enrollment high school program. Having to pay for two years at a university is significantly less than paying for four. Ask your student’s counselor if their school offers this option. Along the same lines, Advanced Placement classes can count for some general education requirements if students pass a test at the end of the course. Check with the colleges you are considering to learn whether they accept AP courses for credit.
More community colleges are partnering with larger four year degree programs to offer tracks to easily transfer general credits. As these programs expand, more and more students see this as the route that makes the most financial sense. Besides lower costs for classes, you can also save on room and board costs that an away college would have. Community college is also an easier way to transition from high school to higher education. Smaller classes and campuses are easier to navigate and staying at or near home may be more comfortable for some students.
Costs can be reduced by doing your research! Visit the U.S. Department of Education’s Federal Student Aid website for suggestions on how to lower your college costs. Every student should fill out the FAFSA (Free Application for Federal Student Aid) to see if they qualify for grants or work study.
There are several federal loan repayment options available to college graduates. One option is the Public Service Loan Forgiveness (PSLF) program, which forgives the remaining balance on direct loans after having made 120 monthly payments while working full-time for a qualifying employer. Keep in mind, there are quite a few restrictions and limited employment options, but it’s well worth looking into.
While they may be tempted to refinance federal loans to private loans, students should approach this with caution, as it may eliminate debt reduction or other repayment options in the future. It can also put a damper on their personal finances later in life.
Crafting a plan to pay for college takes time and effort, but is well worth it to avoid graduating from college with a mountain of debt. By doing your research and having discussions early on, you can give your student (and yourself) one of the most valuable financial gifts. So fear not; there are many ways families can manage college costs while ensuring their children get the education that is right for them.