College has never been more expensive than it is right now.
The numbers above don’t even include room and board! The rising cost of college has led to an explosion in student loan debt in America.
There are some great savings vehicles that can help families save money for college and hopefully reduce the need for student loans. All states offer 529 plans, which are the most popular way to save for college. Families can also utilize custodial UGMA/UTMA accounts and even use a Roth IRA. Additionally, applying for scholarships and federal grants can be a great way to lessen the financial blow. But the truth is that most students looking to go to college will have to take out some form of student loan debt.
Deciding what college to attend usually begins the same way for everyone. The prospective student does some research online about a few schools of interest. The student then takes a few tours of the ones being seriously considered. Applications are sent out and then the final decision on what school to attend is made. These are all important steps in the decision making process.
However, arguably the most important step is filling out the Free Application for Federal Student Aid (FAFSA). This form gives an estimate of how much debt will be needed to go to school. The form gives estimates on what parents should contribute and what the student should contribute. Once these figures are known, the planning process begins.
Parents have two main ways they can help their child financially through college. The first is to save money, plain and simple.
However, parents must consider their entire financial plan when preparing to save for college. Saving too aggressively might leave the family strapped for cash in the present. But saving too modestly might not even make a dent in the cost of sending their child to college. Unfortunately there is no “magic number” when it comes to saving money for college because each person’s situation is different. But here is a hypothetical situation just to demonstrate how a family could save for college.
A couple plans to save $2,000 a year beginning when their baby starts pre-school (roughly around 4 years old). That means this couple has a 14 year time horizon. If they invest $2,000 each year and earn 4% on their investments by the time their child is ready to go to college they’ll have roughly $40,000 saved up.
It’s important to remember that things rarely go in a straight line like this situation. But the point still remains the same. SAVING MONEY is the most important part of this equation. Figuring out the right amount to save is going to be the hardest part. There might have to be adjustments along the way and that’s fine. Putting something as little as $40 a week into a college savings vehicle can make a serious dent in the extraordinary cost of college. Of course investment returns will help increase the amount in the account but investment returns should not be relied upon because nobody knows what the stock market is going to do in the future.
The other way that parents can help their child financially through college is by stressing how serious student loan debt actually is.
The last thing any student going away to college wants to talk about is the ins and outs of their student loans. Communicating with an 18 year old about going thousands of dollars into debt will not be easy. But, it is absolutely crucial to their financial well-being that they know exactly how much money they will be on the hook for once they graduate.
The student should know how indebted he/she is because they can then plan exactly how they are going to make the first few loan payments. Also it might make the student more willing to put in extra work at college. Although it may seem cruel parents can use the looming student loan debt payments as an extra motivator for their child to strive for excellence while at college. Internships, holding leadership roles on campus and participating in extracurricular activities are all part of building a resume. Hopefully that will translate into a high paying job.
Paying off student loan debt is typically one of the first experiences people have with building credit, which is EXTREMELY important for a young individual.
A recent college graduate that I’m close with got his student loan payment schedule mixed up with a school he transferred from. The student loan company thought that he was past due on a payment (when he was not) and his credit score took a major hit. He later applied for an Exxon credit card and was DENIED because his credit score did not meet their requirements. When have you ever heard of someone getting denied an Exxon credit card?!
He corrected the mistake with the student loan company and his credit score was restored to what it should have been. A few months later he was approved for a mortgage and finally got that Exxon gas card too. Long story short, paying off your student loan debt has major future life implications. Even missing one payment can have ripple effects and really hurt down the road.
Parents usually discuss saving money, investing that savings in some capacity and filling out FAFSA as ways to help their child through college. An often overlooked piece of the college planning process is explaining, in dollar and cents, exactly how much money the child will owe once they graduate. Not many college students realize the magnitude of it until after graduation. With open communication parents can help their college student understand just how important paying off student loans can be.
When college students graduate and join the “real world” it can be a tough adjustment. Seeing the first student loan payment can be a frightening event. Armed with proper knowledge about their student loan debt, these young individuals will have an upper hand when it comes to actually paying it off. As much of a burden as student loan debt may be, it is also an opportunity for these young individuals to get their finances in order at an early age.
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