College Planning and Student Loan Debt

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Parents want to be able to provide funds for their children in the event they attend college. The most common types of accounts are state 529 plans and Coverdell accounts. Other students will need to use student loans or a combination of savings plans and debt to fund their education.

Debt was not the only avenue I used to pay for my own college education but it was a tool in the belt, which like most Americans, I used to reach my goals and objectives. I’m happy it was available; otherwise I would not have been able to further my college career. My situation has allowed me to understand the process better and fueled my passion to help others navigate through it.

It is also important to acknowledge our nation’s students are in deep debt. A debt profile in the Council for Economic Education illustrates the average student loan debt for 2014 was $32,956. How are we teaching our children to be smart about their choices in regards to debt when it is still a click away? Students are getting into debt with no skin in the game – we don’t even require them to finish the semester which initiated the debt in the first place and 30% of students with college loans drop out without a degree.

Some states are pioneers in financial education. There are 3 states in the nation which require a personal finance course to graduate from high school including Oklahoma, Utah and Virginia. These states report students have a better understanding of economics and finance and are known to make better financial decisions.

Help your kids consider the following when making decisions to fund their education:

  1. Would it be possible to get a part time job before and/or during college to decrease the debt burden? Working during the summer is not only a great way to reduce the debt burden but it also teaches kids the value of money.
  2. Have I exhausted all scholarship or grant possibilities? Filling out scholarships can be tedious but you will be paid for your efforts if you are awarded one.
  3. What interest rate will I be paying? The interest is what you are paying to be able to borrow that money now.
  4. How long do you think it will take you to pay it? The longer it takes, the more of your money you are using to pay off the loan.
  5. Once you decide to apply for a loan, develop a plan to pay the loan, include a minimum payment you will make and determine a time frame in which you will pay the loan back.
  6. Stick to your plan and if you can’t, then formulate a new plan that works for your situation. Always have a plan to pay it back.
  7. Set up automatic withdrawals from your account for payments so you never forget to make payments, get charged a late fee or mess up your credit history.

For parents who have the ability to aid in college plans, savings plans are great tool and they also have tax benefits at withdrawal. The accounts are opened with after-tax dollars so there’s no upfront federal deduction but as long as the money is used for qualified expenses, then withdrawals are tax-free.

529 plans have high contributions limits and can even be jump started by using 5 years’ worth of the annual gift tax exemption of $14,000, or $70,000. You would not be able to make further contributions during that time but the account receives the benefit of having more money invested longer. If you open the 529 plan in your state, you may benefit from a state tax deduction as well. The contribution limits vary by state.

Coverdell accounts, which carry a $2,000 annual contribution limit, can be used for prep school as well as higher education. But if your child does not use the funds for higher education by age 30 then you must withdraw the funds and pay taxes on the gains and a 10% penalty.

An option both of these accounts have is the ability to change owners. If one of your children did not use all the funds, you can transfer the account to another child.

There are many ways we can help our kids with their future. Teaching them good money habits, setting up savings accounts for them and helping them navigate through student loans are a few ways we can ensure they get started on the right path. As long as we communicate with them and provide the information needed, we can help them make the right decisions so they too can pursue financial freedom.

If you want further tips on teaching kids about good money habits, check out my blog American and Immigrant Parents: Life Lessons About Money. I explore ways to teach kids to save and understand credit early on.

If you are interested in finding what your state is doing to improve financial health, visit the website, The Economic Council for Economic Education.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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