Deciding on the Right College Funding Plan For Your Kids
America's student loan debt now stands at more than $1.6 trillion according to research from the Center for Microeconomic Data. What’s equally if not more concerning is we’ve gone from roughly 240 billion in student loan debt 15 years ago to now pushing over 1.6 trillion.
That's about 1.5 times what Americans owe on their credit cards.
The reality is 7 in 10 graduates have student loans. The average student's piece of that debt comes in around $37,693. Twenty years after graduating, most borrowers will still owe $20,000 to Sallie Mae for student loans. For federal student loans, that average student could owe roughly $350 month payment under the standard 10-year repayment schedule. That might not seem like much, but with growing priorities such as starting to save for retirement, purchasing a home, or starting a family (not to mention mom and dad are no longer paying for things like insurance, cell phone bills, etc.) a $350 month payment can sure start to feel like a lot.
How can you help make sure your student doesn't fall into the student debt trap?
First, recognize that college is a financial decision, not just an academic one. In addition to shopping for the best higher education program for your student, look for the best economic choice.
Consider the following examples:
The current cost at UCLA stands at roughly $36,000* a year for California residents. That’s $144,000 for four years of college.
Students at Cal State Fullerton pay about $28,000* annually.
At University of California Irvine, costs run around $ 36,000* per year.
At Chapman University, a private university, cost of attendance stands at about $78,000* per year.
California residents attending Orange Coast Community College will pay close to $7,000 per year (not including room and board (i.e. a student living at home)).
*The above costs are the estimated total amount it will cost to attend that college. In most cases, it includes items such as tuition and fees, room and board, books, supplies, transportation etc.
As you can see, college expenses may range from inexpensive to several hundred thousand dollars over the course of a bachelor's degree.
To further complicate matters, the least expensive option is not always the school with the lowest tuition price listed on their website. Financial aid packages vary widely from institution to institution and can further confuse the total cost of the degree.
How can you make a wise financial choice for you and your student?
Here's What you Need to Know About Financial Aid for Higher Education:
The Right College Loans
Although 69% of American students take out college loans, misconceptions abound regarding this form of financial aid. Let's look at a few myths about student loans:
Myth: Private and federal student loans are the same thing.
Truth: Private loans require a credit check, come with no government subsidies, and often charge higher interest rates. federal student loans may provide access to a variety of repayment and/or forgiveness options and in some cases can come with government subsidies on the interest portion of the repayment.
Myth: You don't need to pay student loans during your grace period.
Truth: It's true that no one will force you to pay your student loans during your grace period - often 6 months long - but remember some of your loans may be accruing interest during that time. So it's smart to pay down your loans even when you don't have to.
Myth: Student loans don't impact your credit score.
Truth: If you fall behind on your student loan payments, your credit score will take a hit, affecting your ability to get a mortgage, car loan, or business line of credit.
Biggest myth of all: You can't pay for college without a student loan.
Grants, scholarships, 529 Plans, military benefits, savings, and second jobs can all help eliminate the need to borrow money for college.
Let's look at college funding options besides student loans.
529 Plans
A 529 plan is one of the smartest ways to help your student fund their college tuition.
What is a 529 plan?
A 529 plan is a tax-advantaged plan to help pay for educational expenses. You can invest in one of two types of 529 plans — a savings plan or a prepaid tuition plan.
In a savings plan, the money you set aside will grow tax deferred. If you make withdrawals only for qualifying educational purposes, those withdrawals are tax free.
Under a prepaid tuition plan, you prepay for a college or university of your choice, locking in today's relatively low tuition rates.
What are the Advantages of a 529 Plan?
529 plans offer numerous financial benefits.
You can enjoy federal and state tax breaks regardless of your income.
529 plans can pay for traditional college, vocational school, or a qualifying apprenticeship program. As a bonus, parents can even use leftover funds to help pay for a degree for themselves.
If you aren't happy with your initial investment portfolio, you can change it with some limited exceptions.
Is it Worth Setting up a 529 Plan?
Many parents consider a 529 to be a no-brainer. Who wouldn't want to watch money grow tax deferred to help fund their child's college bill?
For many families, funding a 529 plan for at least some portion can be a great choice; however, they aren't the best option for everyone. And not all plans are created equal. Consider talking to a qualified financial advisor about your goals before opening an investment account in a 529 plan.
Scholarships and Grants
Scholarships and grants are FREE money you can be used to help pay for college. These two forms of financial aid share a lot in common, but they aren't exactly the same thing. Let's explore the difference:
Scholarships — Private organizations offer scholarships to students who meet their criteria. Each donor determines their own criteria and the rules for determining scholarship recipients. Some people get scholarships based on their academic or athletic merit, their race or ethnicity, or their personal background. A scholarship can range from a few hundred dollars to a full ride. Colleges themselves also offer institutional scholarships, which can, again, vary from a small amount to a full ride. These are often part of the overall financial aid package.
Grants — Grants are much like scholarships, but they are usually funded by the government, not private donors. In addition, applicants simply qualify, not compete, for most grants. The best-known federal educational grant is the Pell Grant, and it goes to students who demonstrate financial need.
Keep in mind, not all students and institutions are equal. So while institutional grants and scholarships often make up the largest portion of FREE money towards the cost of education, that money ranges from college to college. At Cooke Wealth Management, we help college bound families identify and compare their students’ net cost among their desired colleges so we can help you plan for that cost
Personal Investment in College Tuition
No matter how much financial aid you qualify for, it’s likely you’ll want to directly pay for at least a portion of your student's college costs. In most cases the years your student spends in college overlap with your peak earning years. That can be good news.
It can be important to have a clear understanding of how to fund college and the options available to your family. Remember, it’s likely one of the largest financial decisions that your student will make over their lifetime (outside of buying a home that is for those of us who live in Southern California).
College is expensive, but it might not have to be. Taking the time to explore the right college options for your student can help you cut the cost of college. Reach out to the team at Cooke Wealth Management for a consultation to get a better overall understanding.