Affording College: Tips for Students and Parents
Today when we think of “college” we almost immediately think of skyrocketing costs and the student loan crisis. But it doesn’t have to be this way. While affording college is a goal for most American families, it is rarely a reality. We want this to change. At Clearpoint, we want to help you save money and afford life’s financial milestones, and going to college is one of these milestones. So let’s make it affordable. We have put together some tips and resources for parents and students so that affording college can be a realistic goal.
Affording College: Tips for Students
The first hurdle to affording college is deciding where to go to school. There are a lot of factors to consider, from academic programs, to class size, to athletics. At Clearpoint, we encourage consumers to look at college as primarily a financial decision. But that doesn’t mean that you can’t have flexibility.
Students should be applying to multiple schools and completing all financial aid applications with each school. From there, see which school is offering the most free money and has the lowest out-of-pocket cost. Free money includes:
- Programs like work-study
Just because a school has a really high tuition or “sticker price,” does not mean that attending the school will actually be expensive. In some cases, expensive schools also have large endowments. In other words, they have a lot of money to give away, especially to low income students. Many also have programs that “cap” a student’s loan debt at a manageable level, based on income.
For this reason, it is important to consider a variety of schools and review financial aid offers carefully.
Working in College
The next step to affording college is to make smart financial decisions while enrolled. This means that students should take advantage of work-study programs and/or look for jobs on campus or nearby. Work-study programs have limited hours and may not offer as good of pay as other available jobs, so be sure to do your research. Pro tip: the best college job will be one that allows you to do some homework or studying while on the job.
Paying down Student Loan Debt
We’ve already talked about paying off student loans early, and starting the repayment while in college will get you even further ahead of the game. Keep track of your loans from day 1 of college and prioritize them by interest rate (remember: this is the best way to pay off student loans). If you have private or unsubsidized student loans, these will have the highest interest rates and will start accumulating interest while you are still in school.
If you are working and saving money, you can make payments on the accrued interest and also work to minimize the principal. You might be surprised to know that you can pay off several student loans before you even graduate. This makes affording college even easier, since you will have less to worry about after graduation.
Affording College: Tips for Parents
College Savings Plans
If you start early, saving for your child’s education can be fairly painless and can make affording college a much more feasible goal. We want you to be able to avoid other options, like bad credit student loans, which make college much more expensive. If you do need to take out some loans to supplement your savings, consider the PLUS Loan because it provides at least some safety nets. Here are a few plans you can consider as you save for college. These offer various levels of investment flexibility and projected returns. Perhaps the most convenient plan is the 529, but we have reviewed other options as well.
529 Plans are the state-operated college savings plans that everyone has been talking about. These plans are invested similarly to a 401k or IRA, using mutual funds or other investments. As a rule, these plans shift from stocks to bonds (or, more generally, from riskier to safer investments) as the child approaches college age.
While every state now offers a 529 plan, you can actually invest in a 529 plan offered by another state. Even if you live in Virginia, you can invest in a California 529 plan.
Here’s the rule-of-thumb to keep in mind when considering this: If your state offers an income-tax deduction for investing in its 529 plan, invest in-state. If this isn’t offered, consider looking elsewhere.
Here are the highest rated 529 plans for state residents:
- New Jersey
- New York
- South Dakota
If you are in one of these states, you should strongly consider using the state 529 plan, because you likely won’t find better benefits out of state. If you aren’t in one of these states, you might consider one of the top-rated 529 plans for non-residents:
- New York
- College Savings Bank
Special thanks to Finaid for these ratings.
Another type of 529 plan is the prepaid plan, which is currently offered by many states, although some may be closed for new enrollment.
What’s the difference?
A prepaid college savings plan guarantees that the money invested will grow at the same rate as college tuition. So, when you hear news reports that “college tuition is rising at alarming rates” you can breathe easy knowing that it won’t affect you (as much) if you have chosen this plan. In essence, this plan “locks in” college tuition at the current costs.
The funds from this plan are intended to be used for in-state schools. However, if a child decides to attend out-of state or private school, he or she may be able to use the prepaid plan for the amount of average in-state costs. This varies by state; in some cases you may just have your funds returned with interest.
Prepaid savings plans are considered more conservative, since there is (in theory) no investment risk. They also are good options for students who are older and whose parents did not start saving early. But keep in mind that most plans do not allow high school students to enroll.
The main issue with prepaid tuition plans is that many states are phasing them out and that they are unfavorable for students who decide to attend private or out-of-state schools.
The Coverdell ESA
While many people have heard of 529 plans, “Coverdell” isn’t exactly a household name. A Coverdell Education Savings Account is also a tax-advantaged college savings plan, but it has a few key differences from the 529:
- The Coverdell Education Savings Account can be used to fund expenses for elementary and secondary school.
- Coverdell ESAs allow for greater investment flexibility, allowing for the inclusion of almost any type of investment. This is different than the rigid 529 plans offered by states.
- There are numerous regulations around contributions and income levels of the donors. As a rule, the regulations of the Coverdell Accounts are more stringent, but the fees are cheaper and the flexibility is greater.
- A 529 Plan is “revocable” and a Coverdell is not. This means that contributors to a 529 can take their funds back at any time. The Coverdell does not extend this option to the donor(s).
If you want more flexibility in your college savings investments, check out this list of Coverdell ESA providers to get started.
The Gerber Life College Plan
Many financial investors criticize the Gerber Life College Plan as a bad way to save for college, compared to other options.
Here’s how it works
When opening a Gerber Life College Plan, you decide on an amount between $10,000 and $150,000 that you want to receive and when you want to receive it between 10 and 20 years from your first contribution. Based on this information, Gerber sets a monthly payment plan for you to reach this goal.
When your “time is up,” Gerber will pay out the amount you set, and this will actually be greater than the total of all your monthly payments. In this sense, there is a minor amount of interest gained, but this appears to be difficult to calculate or predict, based on the information listed on Gerber’s website.
This plan also doubles as life insurance on the parent, and the full “goal amount” is disbursed to the child in the case of a tragic life event to the parent. And, it encourages structured saving each month, which works really well for some consumers.
The issues with this plan are that very little interest is gained, and there may be unfavorable tax implications on any growth.The tax benefits and growth potential of other college savings plans are better, and most consumers probably want to avoid the Gerber Plan.
As parents and students work toward the goal of affording college and putting together the necessary funds for attendance, the idea of cosigning a student loan may come into the picture. This is likely to happen when a student needs a private loan but has no significant credit history.
The good news is that by cosigning the loan, you will help your child secure college funding and likely at a more favorable interest rate (assuming you have decent to good credit).
The bad news: you are legally responsible for the loan if your child defaults.
What can you do instead? Consider increasing the Parent PLUS Loan amount. Of course, this loan will be in your name, but it will likely have a better interest rate than a private loan.
Without a doubt, it will have better repayment terms, because it is a federal loan. This means that there are numerous repayment options available; you can learn more from a student loan counselor.
You can also make “unofficial” arrangements with your child that he or she will help pay back the PLUS Loan. Of course, you can’t enforce this legally, but maybe your child can help. This is likely a better alternative than cosigning for a loan that you will be ultimately responsible for anyway.
Affording College is Easier if You Start Early
We have covered several strategies for students and parents that will make affording college easier. The key is to start planning as early as possible. Every bit you can save helps, and for students, every bit you can pay on your loans early will help down the road as well.
Affording college is doable. Follow these tips to make it a reality for you.
Have any other suggestions for affording college? Let us know in the comments below.
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