Free at Last: Controlling Student Loan Debt

student loan

I’m free.

The two words my sister reflects on today regarding paying for college for her first born child.  As any parent would, she thought regularly of ways to prepare for putting my niece through college many years leading up to her senior year in high school, and I would not let her consider touching her retirement funds.

She helped ensure my niece’s grades were in place, and signed her up for opportunities to volunteer in the community and at church. My sister knew this would build a desirable educational and leadership resume in preparation for the college application process.  The scholarship application process was a part-time job in itself, applying for dozens of scholarships from multiple corporations and organizations – all with deadlines and essay requirements.

So how do you pay for your child to go college? It’s graduation season, so I know many parents across the globe have asked the very same question, and are tossing back and forth with what strategy works best for their family.

While we all know that one should prepare as soon as possible by saving money, sometimes as a parent, you just don’t get serious about saving for a college education until close to the teen years.

In 2014, the average student loan debt for 70% of college students who attended a public or private nonprofit college was $28,950, according to the Institute of College Access and Success.  Between grants, scholarships, pre-paid tuition plans, 529 saving plans and student loans, all of these options will have an impact on not only the parents’ finances, but also the student’s financial future.

Here are some alternatives to making this process a little easier and more manageable on your wallet.

Strategies for Paying for College

529 Gifts.  Over the years, with every birthday and Christmas that passes by, instead of providing the notorious “list of wants” for the child, such as their favorite doll or tennis shoes, give the 529 monetary contribution as an option.

In most states, the Section 529 plans, setup by and controlled by the parent, will allow for people other than the parent to contribute to an account. This could really add up over the years with compounding interest.  This is especially a great option for grandparents or godparents who regularly give gifts to the child.  If you intend to save less than $2,000 per year, there are other saving plan options, e.g. a Coverdell Education Savings account, that can help you reach that goal.

Early College High School.   You could potentially cut tuition in half by leading your child to apply for an early college High School program in the eighth grade.  This awesome opportunity allows the student to spend their 9th through 12th grades earning their high school diploma while simultaneously earning a two-year Associate degree, or two years of transferrable credit towards a four-year college or university.

Eliminating two years of tuition is a huge savings for you, but careful planning many years before your child walks across the stage is necessary to determine if early college is feasible for you and your son or daughter.  I understand sometimes the student may think they are going to miss out on a true high school experience, however, these programs do try to incorporate many of those experiences, such as prom, senior class trips, and senior pictures.

Keep in mind, if this type of program isn’t offered in your area, the student could enroll in a community college for the first two years, then transfer credits to a four-year college or university of their choice, if money is truly a factor.

Part-Time Job.   Many teens start working part-time in high school to fund their miscellaneous expenses such as gas or car insurance as mandated by mom and dad.  I suggest a similar arrangement in college to assist parents with paying for tuition for the upcoming semester.

They can work full-time in the summer to build up funds for the following semester to cover books or to help with tuition and other expected fees.  This is well worth the sacrifice while earning a degree for the ultimate goal of graduating student loan debt free.

WHAT NOT TO DO

No dipping into the 401k

Many parents are tempted to dip into a 401k retirement account with an employer to pay for college expenses.  This is a big mistake.  While hardship withdrawals are an option, there are some repercussions that are not worth the time and money lost building your retirement funds so you can retire comfortably.

You have to pay income taxes on the funds withdrawn, and the IRS will penalize you an additional 10% on top of the income taxes if you’re not age 59 ½.  In addition, you are not able to contribute to your 401k for six months under Safe Harbor laws.  Hardship withdrawals are considered a true hardship, and if you are in a hardship, then how can you afford to reduce your income to place monies into your 401k each pay period?  You want to avoid this at all costs without pulling your hair out – just stay focused on paying for college by other means without drawing from your retirement funds.

Credit Cards…Say No, no, no, no, no!

We all want to be rewarded for spending money, but using your credit card to pay for college is not the best use of your shopping power, even if you’re earning rewards or airline miles as a bonus.  Most credit cards charge anywhere between 15%-30% interest, so your chances of paying the money back could take you over 6 years.

For example, let’s say your credit card bill is $1,000.  Assuming an Annual Interest Rate (APR) of 15%, making a minimum payment of $20/month, the approximate total interest paid would be $579.12.  It would take 6.6 years before you’re free of that debt! Let’s say no to credit cards altogether, parents.

Avoid Excessive Student Loans

Financial aid is necessary to help supplement the money saved for your college student.  The main thing to remember is not to over-borrow and not to over-spend.

The student loan companies are going to start hounding you and/or your child for payments on the debt within 6 months of graduation.  While their interest rate is much more manageable (normally running between 3%-6%), you only want to borrow the absolute minimum needed to assist your child in paying for the expenses.  Any additional amounts left over each semester should be placed in an interest-bearing account, and paid back in a lump sum as soon as the first payment is due.

You may be that parent who manages your money well, or one who started saving for college from day one of your child’s life.  However, this may not be the case for the majority of parents.  I want to encourage you to really think about how these decisions can affect your child’s future.

Can you imagine the head start our children would have if they graduated from college with no student loan debt?  I can describe this in one word: Free.  Well, actually two: Financially Free!

Giving them this financial relief is beneficial to their confidence and releases them from the pressure of that first major bill upon graduation.  Once my sister really understood this revelation, she was officially free of any anxiety regarding college costs.  Free at last!  My mission was accomplished.

So, what’s the play call?

Take some time to prepare for this chapter of your future or new graduate’s life.  Use some of these tips to keep you focused on achieving no student loan debt or minimal debt to give your son or daughter a stress free beginning.

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Christy Mercer
With a love for teaching and a passion for financial planning, Christy has built a reputation for providing trustworthy financial and real estate advice to clients for over 15 years.  She is a licensed Realtor/Broker in North Carolina, as well as an experienced Retirement Professional for a Fortune 100 financial services organization.  She loves volleyball, bowling, tutoring math, and aspires to be an author.

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