The importance of a college education in today’s society is greater than ever. Unfortunately, as the importance rises, so do the costs. Our future generations are shackled by the strong demand for higher education that leaves them unduly burdened with massive debt.The enormity of the financial obligation of a college education have rendered the meager savings most families have managed insufficient to cover the costs of a four-year degree. This is why it’s so important for families to begin making plans and taking action as quickly as possible.
Below are a few things you can do, in addition to traditional college savings accounts, to help your children pay for college without taking on a crippling amount of debt in the process.
Shift Your Thinking Beyond Simple Savings Accounts
According to Sallie Mae, 61 percent of families have no plan to save for college. Among those who are saving for college, 61 percent only have general savings accounts rather than specific college savings plans. It is true that some savings is better than none, a general savings accounts does not offer the kinds of benefits you’ll find with the following types of college savings plans.
- 529 Plans
- UTMA Accounts
- Coverdell Education Savings Accounts (ESAs)
Begin Saving Early; Invest Regularly
Borrowing money to pay for college requires you to pay interest on the loan. When you invest money for your child’s education, the account earns interest. The longer you save and the more regularly you make contributions, the more that money grows over time.
The earlier you begin saving, the larger the difference will be. For instance, J.P. Morgan states that by saving $500 per month for your child’s education, beginning at birth, you will earn $84,214 more than if you begin when your child is six years of age.
Choose Higher Education Wisely
While many parents and students ignore the potential benefits of community college, students can get an exemplary and cost-effective education by attending community college for two years before transferring to a university. The majority (two thirds) of students who attend a community college for the first two years go on to obtain their bachelors or masters degree.
At today’s rates, the difference in costs between community colleges and private universities can be over $100,000. And if that isn’t a big enough discrepancy, the graph below shows those numbers may triple within the next two decades
Financial Aid and Scholarships Aren’t Guaranteed
Only 12 percent of students receive grants and 16 percent of students receive scholarships. Among those, only 0.3 percent (a very small margin) receive full-ride scholarships. More people from middle class and upper income families are applying for assistance than ever before leaving less money available to go around – and rarely enough to cover all educational expenses. Check out these statistics regarding financial aid from JP Morgan.
Don’t Invest Your Retirement for Your Child’s College
Another revelation from the Sallie Mae Report is that nearly two in five parents are either planning to use their retirement funds to pay for a child’s college or are at least considering it. This will rob your retirement savings of years of interest earnings and decimate the compounding factor that helps these accounts support your retirement – placing you years away from your retirement goals.
That’s before you take into account things like penalties, taxes, and the fact that your child will have to claim the money you withdraw for his or her education as income – which could jeopardize financial grants and scholarships.
A college education is supposed to free people from a life of burdensome debt, not guarantee one. Using all these tips and methods will help make college a more affordable option for your child to consider.