Providing funds to pay for a child’s college education is one of the largest expenses that parents face.
According to a report sponsored by The Institute for College Access & Success titled “Student Debt and the Class of 2013,” 69 percent of graduating seniors of nonprofit colleges and universities throughout the United States left with student loans, and the average debt was $28,400.
Although the cost of attending college is high, the benefits exceed the costs. On average, those with an undergraduate degree will have life-time earnings of almost twice those with a high-school diploma and will have lower rates of unemployment.
So, what are parents to do to avoid incurring a lot of debt to pay for the child’s college education?
The University of Alabama’s Dr. Robert McLeod offers the following suggestions to reduce the burden of student debt.
- Start saving early: The longer the time before the need arises the easier it is to accumulate the funds.
- Take advantage of tax advantaged college savings plans such as 529 Plans:
- Prepaid Tuition plans allow you to purchase a plan to pay for tuition in advance, either in a lump sum or periodic payments.
- Savings Plans allow you to choose different investment options, and the amount that you accumulate to pay college expenses depends on the performance of the investment choices; the length of time funds are invested; and the timing and the amount invested.
- Establish a budget with the child:
- As the time to apply to college approaches, you should have a candid discussion with your child as to what you can afford.
- If the costs of attending the college selected exceed the funds that have been put aside, then the ways to cover the shortfall must be addressed or an alternative option must be considered, such as staying at home and attending a local or community college for a few years and then transferring.
- If there is a shortage of funds projected, you need to seek financial aid:
- Merit-Based Aid: This category includes scholarships that are awarded without regard to financial need. Remember to start researching scholarship opportunities early, usually in the student’s junior year of high school.
- Need-based Aid: You should complete the Free Application for Federal Student Aid (FAFSA), which is used to determine federal, state and institutional need-based eligibility. Some examples of need-based aid are:
- Grants
- Loans
- Work Study
The keys to successfully financing a child’s college education is to start saving early, and encourage the student to excel in the classroom to become eligible for merit-based aid. If funds from these sources are not sufficient, then consider grants, loans and work-study opportunities. Regardless of the sources of funds to pay for college education, the benefits outweigh the costs.
McLeod is a John S. Bickley Faculty Fellow and professor of finance in UA’s Culverhouse College of Commerce.
