Much has been written about the importance of a college education. Arguably, even more has been written about the rising cost of that college education, with the average college graduate leaving school with more than $25,000 in student loans. The question is what can we do about it? Especially as parents, how can we help prevent our children from being saddled with this heavy burden right as they enter the workforce?
I’m not saying I have all the answers, because I definitely do not. And I don’t believe there is any one set of answers that’s correct for each family, because every family is in a different position.
I know that I grew up in a pretty poor family. Our poor financial condition in combination with my academic achievement in high school meant that I qualified for a lot of state grants to help pay for college. I also received a number of academic scholarships that helped. So, I was able to attend a four-year private college and only had to take out around $5,000 in student loans. I chose a college close to home and lived at home for two of my four years to save money. My younger sister received even more state grants than I did, so she’s able to attend a great state school with both tuition and room and board covered by those grants.
Our College Savings Plan
While being poor certainly has its advantages as far as receiving college financial aid, I don’t want to go that route for our own children. Based on my current income I would expect to be on the receiving end of some financial aid such as a Pell grant or a small amount of state grants, but I fully intend on moving significantly up the pay scale by the time our little boy starts college. As such, I’m not counting on much financial aid in the form of state and federal grants.
So, last year when our little boy was born, we opened up a 529 college savings account through our state. The nice thing about a 529 account is that you don’t pay any taxes on your investment earnings. Also, depending on your state, you may be eligible for a credit on your income taxes. I know that here in Indiana, you can get a 20% tax credit on contributions up to $5,000. In other words, if you live in Indiana and contribute $5,000 to an Indiana 529 plan you get $1,000 knocked off your tax bill.
We aren’t contributing a whole lot right now, but we do have an automatic transfer set up each month to put money into his college account. With every birthday, I go in and increase the monthly transfer (granted, I’ve only had to do this once so far). I have a spreadsheet that estimates about how much he’ll have towards college, and it looks like he’ll have enough to cover about half of his total tuition and room and board at a state university for four years.
It’s Just Not Enough
When you look at it, though, the college savings we’ll have isn’t really enough to prevent him from incurring a mountain of student loan debt to get through a typical four-year college. I think this is the situation that many people face, especially middle class households. We simply don’t make enough to fully pay for our children’s college educations while at the same time paying the mortgage and funding our own retirement accounts. So, what’s a family to do?
First of all, you have to realize that it’s ok as parents not to foot the entire bill for college. No one is going to get on you for paying the mortgage and funding your own retirement first, and then putting aside some of the remainder for your children’s college. If needed, your children can get loans for college. But there are no loans for retirement.
Beyond that, when the times comes to apply and decide on which college to attend, we’ll sit down and have an open discussion about what college is going to cost and how much money is available. We will strongly encourage taking advanced placement courses in high school to earn college credit. We will also strongly encourage that he attend a local campus of a state university for the first year or two. This way he can complete many of his general education requirements at a fraction of what it would cost at the primary state university. However, we’re going to let him make the ultimate decision.
Knowledge Is Power
I think the problem many students encounter is that they really have no idea what their budget is realistically going to look like once they graduate college. They fail to consider just how big a share of their paycheck is going to go towards their student loans. So, if our little boy has his heart set on a certain university and is dead set on being there all four years, we’re going to let him. But we’re going to show him exactly how much mom and dad will be paying, how much debt he’ll be incurring, what kind of student loan payment he’ll be making once he graduates, what his likely income will be, and what his other expenses will be. He may still choose to go that route, but he will do so fully knowing what he’s in for once he graduates.