Saving for College
How much student loan debt do you think the average college student accumulates by the time they graduate? $5,000, $10,000? Think higher. According to the Wall Street Journal, the average college graduate’s student loan debt is a staggering $37,172.
Saving for college as early as possible is the best way you can help your children (or grandchildren) avoid crippling student loan debt. This requires a significant and long-term financial commitment, but saving consistently — even small amounts — can add up over time.
Here are a few tips for saving for college:
Set up a college savings plan, such as a 529 plan or an Education Savings Account (ESA). A 529 plan offers tax and financial aid benefits. Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. You can contribute up to $16,000 to each child’s 529 account without incurring federal gift tax.
An ESA is a trust or custodial account that allows you to save and grow your money for educational purposes. It’s very similar to a 529 plan, but with more restrictions and two major differences: The contribution limit for an ESA is only $2,000 per child per year, but you can choose almost any kind of investment — stocks, bonds and mutual funds. The money you contribute to an ESA grows tax-free, and you won’t have to pay taxes when you withdraw the money to pay for education expenses.
Apply for scholarships and other financial aid. There are thousands of local, regional and national scholarships available to prospective college students. Some are based upon certain GPA or test scores, while others are based on a variety of other criteria. To start, check with your child’s high school guidance office, explore federal or local options and check out reputable college scholarship websites that publicize a plethora of scholarships and grants.
Consider more cost-effective options. When evaluating college choices, often the local state university (or a community college for the first few years of college) offers a very competitive academic education, and the price tag is usually significantly less than the private colleges in the same area. It might not be your child’s first choice, but given the responsibility of having to pay off thousands of dollars of college debt, today this option has become quite popular.