According to Collegedata.com, the average annual cost of tuition and fees for the 2017-2018 school year was $9,970 at an average public college for in-state residents. Out-of-state collegians paid an average of $25,620, while those attending private colleges saw average bills of $34,740.
Throw in a typical $10,000-$12,000 for housing and meals, another $1,200 for school supplies, and another $3,000 for collective personal expenses, and you are looking at around $100,000 for a four-year education at a public university and well over a quarter of a million dollars at a private school.
It’s easy to look at your smiling middle-schooler and be wracked with guilt about your inability to foot his or her college bill. A recent survey from Student Loan Hero found over 44% of parents feel that way. Guilt will not help, but action and guidance will.
Start by establishing a 529 program for your child’s education. These state-administered programs allow earning on your contributions to grow tax-free, and withdrawals are also tax-free when the money is used for qualified educational expenses.
Resist the urge to take advantage of the new 529 policy allowing up to $10,000 per year to be used for K-12 expenses, unless your public school options are so poor that you feel a private school is the only choice. “Before the tax reform, you couldn’t use a 529 plan for below-college expenses,” notes Eric Bronnenkant, Betterment Head of Tax. The CPA and Certified Financial Planner® says the law “changed the dynamic of how people use 529 plans.” By withdrawing from 529 plans earlier, you limit the overall growth and tax benefits that the plan was designed to provide.
You may not be able to save enough to avoid student loans, and you won’t be alone. Approximately 52% of survey respondents expect to take out a federal student loan, with 32% of respondents expecting to take out a Parents PLUS loan where parents are responsible for repayment. Another 29% of parents plan to use a personal loan, while 43% said they would rely on private student loans. A surprising 16% plan to put some of their child’s college costs on a credit card – an incredibly poor decision given the large interest rate difference between credit cards and federal student loans.
Approximately 37% of parents have considered borrowing from retirement savings to pay for their child’s college, which is another questionable approach. At best, you lose the tax-deferred growth associated with leaving your retirement fund in place, and at worst you may be faced with a 10% penalty plus taxes on any early withdrawal.
The best approach is still proactive saving. Establish a 529 program with annual contributions, no matter how small, and devote it to college costs to maximize the tax-free growth. Help your children prepare for college and guide them toward potential scholarships, especially lesser-known ones with limited competition. Every little bit helps to reduce a potential student loan burden.
Finally, try to direct your child’s focus toward a return on investment. You can have a great time and make lifelong friends at almost any university. Which one is the most likely to help you get a job that makes it more likely that you can pay off a student loan – and be financially set while others are struggling to make ends meet?
After that, relax. Enjoy the experience of being a parent of a college student. You’ve done all you can do, and it’s time to see how your child deals with their situation and their subsequent choices.
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