Corporate Adulting

Save Your Kids from Student Loan Debt

If there were one piece of advice I could give to parents of a newborn, it would be to start saving for college now.

Most of us are not independently wealthy — at least not enough to comfortably absorb an additional $100,000 to $200,000 hit (the cost of one child in college) to our family incomes over four years without some extreme measures being put into place.

The cost of a college education has increased exponentially the last 30 years. If there were one piece of advice I could give to parents of a newborn, it would be to start saving for college now.

The chart below shows the steep climb of tuition costs for both private and public universities in the last 30 years.

Source: Educationdata.org

According to the same article the above chart was taken from, from 1989 to 2016, the cost to attend college increased almost 8 times faster than wages. Students who graduate today with a college degree are having a hard timing finding jobs, plus they are saddled with crippling student loans that they are struggling to pay well into their thirties. This is not the way to start out adult life — you are already behind.

My husband and I knew we did not want our daughter to have student loans and started measures to begin saving when she was born. While she was our only child, the same concepts below can be applied for multiple children to eliminate or decrease the need for student loan debt.

Painless Ways to Save for College*

Here are some ideas of painless ways to save for college worked well for my family.

· Set up a minor savings account. Most banks will allow you to set up a minor savings account with a minimum deposit of $100. If you don’t have $100, wait until you accumulate that much (put it in a piggy bank, shoebox, mason jar, whatever). A minor savings account will be in the name of the child, but with one or both parents also on the account. This type of account allows maximum flexibility in the future as you can use it for any needed expense.

· Set up automatic deposit from your paycheck. Decide how much you can afford to put away, even if it is only $5 per pay period and set up an automatic deposit directly from your paycheck to the savings account. That way, the money goes into the account before it ever hits your checking account. We started with $10 per pay period and increased it to $25, then $100 over time as our income increased.

· Put all or at least the majority of cash and check gifts into savings. This may be difficult for some parents to do, but we always took cash or checks that our daughter was given as a child and deposited them into her savings account. If this is a step too far for you, put at least 50% of cash gifts into savings and let your child spend the rest. However, if your child is like ours, she already had more stuff than she needed anyway! By the time our daughter graduated from high school, she had over $22,000 in her savings account for college expenses.

· Set up an education savings account. Diversify your college savings by setting up an education savings account, such as a 529 account. The education savings account will allow you to invest in mutual funds, which may increase your savings at a much higher return than a savings account. However, investing does have risk associated with it, so depending on where the stock market is trending when you need the funds for college, you could realize a loss for a period. The stock market does always trend back up over time, so consider the education savings account a longer-term investment. In addition, education savings accounts are a great choice for parents with multiple children as the fund can be used for siblings too. Grandparents and other family members can make contributions to the education savings account if they like as well.

Note: There is a drawback to a 529 plan. Colleges consider it when deciding on financial aid. This means your child could receive less financial aid than you might otherwise need.

These savings only work if you leave the money alone. Pretend it does not even exist until your child is in high school — other than to periodically evaluate if you can put a little more away!

What I Do Not Recommend

· Set up a custodial investment account. We did this for our daughter, thinking it would be a great way to control the investments we made. We did not find out until much later that any gains on the money that we would withdraw from this account would be taxed at the rate of our income since she was a minor. Since the account had increased significantly over time (most of our investments were after 9/11 when the stock market hit historic lows), this would have taken large chunks out of the resulting amounts. We do not regret setting up the account, but it is not useful for paying for college. However, it will be helpful for allowing our daughter to pay for another significant purchase, such as a down payment on a house when she is ready to do so.

· Invest in a prepaid tuition plan. This is another method we used to save for college. We participated in a prepaid tuition program sponsored by the state of Alabama. This plan has been discontinued, but the basic premise is that you make payments into an account for tuition at today’s rates, and then it pays out when your child comes of college age to pay the full tuition at any Alabama state school. You can also use it for private or out of state schools and the amount that the plan will pay is the average of tuition at several state universities. The plan does pay quite a bit of tuition cost, but due to the 2008 recession, there was a time period when we weren’t sure it would pay at all due to the lows in the stock market (the plan nearly went bankrupt). With the great stock market highs in the last several years, this has turned out to be a good investment and viable source of college funding — but it does have significant risk we did not originally anticipate. (Hence why it is discontinued).

How It’s Working Out

Our daughter is a rising junior at a private university, and we do expect her to graduate college without incurring any student loan debt. If she had chosen to go to a public university, she would have probably been able to walk away with a chunk of savings intact, a fact we did explain to her when we were selecting colleges. As it is, she is fortunately a smart cookie and did receive a healthy scholarship that helps offset some of the high cost of her private school.

That said, we believe it will take every bit of her college savings to pay for the cost of her schooling. So far, we have cashed out the education savings account and have about half her savings left. Prepaid tuition has continued to increase it’s payout yearly and that is covering a large portion of her remaining tuition after scholarship. Even so, we are still paying out additional cash each semester to cover costs, not including living costs.

We have the flexibility of only having one child to put through college, and that allows us to absorb additional costs incurred based on the choices our daughter has made. Had she gone to a 2-year public college, then transferred to a public university, the cost would have been radically reduced. We did allow her to choose her college experience, and it is undoubtedly the expensive route. I share this to illustrate that the choices that your child makes can greatly influence the overall cost of a college education. This decision is something I would suggest that you and your child discuss transparently when the time comes.

Summary

Education trends in the future are an unknown, but the last 30 years tell us that costs will keep increasing. The key to painless saving is starting early and planning for the long term. Start when your child is young, and by saving small amounts consistently over time, you can save a great deal of money to help pay for college costs or any other educational needs that may arise after graduation. Your child won’t appreciate it until much later, but it will help them get a great start on adulthood.

• All savings advice given is from my personal experience. I am not a professional financial advisor.

Thanks for reading! Read more of my Corporate Adulting Blog series at https://monicaojendyk.medium.com/.