A U.S. News and World Report assessment of U.S. Bureau of Labor Statistics data from July 2002 to July 2022 found that total consumer price index inflation for college tuition and fees increased by 65% over 20 years. That’s before taking the added cost of books, housing, transportation, food, and any other college-related expenses into consideration. As the average cost of a college education in the U.S. continues to rise, what does it mean for your child’s future education?
The student loan crisis has become a national issue, with many borrowers struggling to make their monthly payments, and a high percentage defaulting on their loans. With a total of more than $1.7 trillion in outstanding student loan debt in the U.S., the Biden administration released a report in August 2022 announcing their plans to address student debt relief.
However, major Supreme Court rulings on student loan debt forgiveness could significantly impact borrowers and the future of student loan forgiveness. A recent ruling resolved a multi-year class action lawsuit to allow The Borrower Defense program to eliminate federal student debt under specific circumstances. This will allow billions of dollars in student loan forgiveness for about 300,000 borrowers who attended specific institutions, according to a report by Forbes.
However, legal challenges continue, and the Supreme Court must still make additional rulings on President Biden’s one-time debt cancellation plan. The case centers on whether or not the government can forgive student loans without taxing the forgiven amount as income. If the Court rules in favor of the government, it could pave the way for significant debt relief for millions of borrowers. However, if the Court rules against the government, it could significantly complicate efforts to provide student loan forgiveness. For now, those with existing student debt remain in limbo as the government battles wage on.
Putting money away to build up your emergency fund, retirement plan, pay off debt and even plan a dream vacation can be stressful. If you have kids, taking more funds from your everyday expenses to stash away for the next 18 or so years can compound that stress. But, with proper planning and early action, you can actually help your child avoid the stress of student loan debt later on in life — and the process doesn’t have to add to your stress level.
Why is saving for college so difficult for parents?
“The main challenge is finding the money,” Derek Sall, personal finance expert and co-founder of LifeAndMyFinaces.com tells Credello. “Parents are already paying for housing, food, primary school, clothes, and cars…there’s hardly any money left to consider saving for college.”
Striking a balance between these competing priorities can be a challenge, but it’s essential to avoid financial stress and uncertainty down the line. After all, focusing on only saving for college while neglecting to save for anything else could put your entire family’s financial future at risk.
Ignoring your child’s college education could limit their future opportunities and cause them stress in the form of student loan debt down the road. If you’re at a crossroads, it’s time to reassess where your money is going and make a plan.
Related: Student loan refinancing
“The first mission for nearly everyone should be to pay off consumer debt. The interest is high, the payments are crippling, and it often keeps you from doing things you really want to do (like putting money away for college),” Sall recommends. “Next, focus on your retirement savings and be sure you’re putting yourself in a good spot financially (because let’s face it, your kids don’t want you living with them when you’re 90). Take care of yourself first, then do a solid for your kids and put some money away for college.”
If you need help getting started with your consumer debt payoff, Credello’s loan payoff calculator is the perfect tool to figure out how far along you are on the road to becoming debt free. With this tool, you can create a plan to pay off personal loans that could be holding you back from saving for other long-term goals like your child’s college education.
How to get started saving for your child’s college education?
“Many families are faced with competing financial objectives, lack of knowledge about how to get started, and sheer overwhelm when beginning to think about planning for the potential cost of higher education,” says Patricia Roberts, Chief Operating Officer at Gift of College, Inc. and author of Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans. “Beyond this, it is estimated that nearly two-thirds of Americans are unfamiliar with one of the most effective ways to save (529 college savings plans). Taking a deep breath, getting up to speed on what the savings and investing options are, and opening an account are the most important first steps. While it’s never too late to begin, getting started when children are young and time is on your side, is the most effective approach.”
Finding the money, of course, is another obstacle. Roberts recommends strategies like examining your expenditures and reallocating funds spent elsewhere to increase the amount of money you can contribute to a college fund.
“What is often overlooked is that what you can save is closely tied to what you spend,” Roberts explains. “To the extent possible, families should take a careful look at expenditures and see if there are opportunities to cut back in order to save for future goals that are important.”
Between inflation and rising tuition costs, another top concern for parents is knowing how much to save. Sall created a free college savings calculator for parents to help solve that exact problem. Parents can input the cost of college today, the age of their child, and the amount they already have saved, and Sall says that “the tool will show you how much you need to invest per month and will also show you some cool stats around the cost of college and how your savings will increase to cover those costs.”
Once you know where your money is coming from and how much you need to save, it’s time to start investing. When it comes to putting money away for college or other career training, a 529 plan is the top recommendation of finance professionals.
What are the benefits of saving for college with a 529 plan?
“A 529 plan is a college savings plan,” explains Sall. “You load it with after-tax money, and the growth on the account is completely tax-free if used for education purposes (tuition, books, housing, etc.). You can either invest your funds or you can pre-pay for college by buying college credits at today’s price. There are no annual contribution limits on 529 plans.”
Here’s a look at some of the benefits you can expect when you use a 529 plan to save for your child’s college:
- Tax advantages. “Unlike other forms of savings and investing, when 529 plan accounts grow in value, no tax is owed on the earnings,” Roberts explains. Additionally, many states offer state tax deductions or credits on contributions and withdrawals used for educational expenses like tuition, books, or room and board are tax-free.
- Inexpensive start-up costs. “In addition to taking only 15 minutes or less to open, most 529 plan accounts can be opened with as little as $25,” says Roberts.
- Parental control. If you’re worried about your child using their college funds for purposes other than education, rest assured that with a 529 plan, you, as the account owner, can stay in control for the entire life of the account. “Unlike UTMA or UGMA accounts where access to funds is provided when the child reaches age 18 or 21, the account beneficiary on a 529 plan never is given direct access to funds,” Roberts says. “Parents, who want to ensure the money saved is used for its intended purpose, appreciate knowing that they control whether and when to disburse funds.”
- Contributions from others. “Unlike other forms of investments for higher education, most 529 college savings plans make it possible for account owners to invite others to contribute with ease to the 529 account they established,” says Roberts. Parents can invite relatives, friends, and even their employers to add funds to 529 plans. Employers can contribute as a financial wellness benefit, and family members can give gifts that won’t be outgrown. In short, you don’t have to save alone.
If you start saving for your child’s future now — whether that’s college, trade, or technical training — it can help ensure that they have the resources they need to reach their goals in a way that’s less financially stressful than taking out a mountain of student loan debt.
Life is all about balance. So, whether you need to cut back on extra expenses to prioritize adding to your child’s college savings fund or shift what’s spent on daycare to a 529 once your child starts school, there are ways to make your money work for you. Making a plan today can save you and your kids from future financial stress.