College grads are burdened with more student debt than ever before. Sixty-nine percent of 2018 graduates took out student loans to help cover the bill, and their average debt came in at $29,800. Millennial borrowers have been particularly burned by the cost of college; so much so that 46% say they don’t want their kids to have to take out student loans. The upside is that parents have perhaps never been more motivated to get ahead of their kids’ college funds. In addition to scholarships and grants, here are five expert-backed ways to help your kids prepare for college without student loans.
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1. Kick into a 529 savings plan
When it comes to bulking up your kids’ college funds — and cutting your dependency on student loans — the 529 is far and away your best option. This savings plan allows you to put away money for college that will grow tax-free. You also won’t be hit with taxes when the time comes to cash in.
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2. Contribute early
“If there’s anything I can stress to parents, it’s the earlier [you start contributing] the better because the longer you have the money in there to compound is a tremendous advantage to you as a parent,” said Paul Sydlansky, a certified financial planner and founder of Lake Road Advisors. “If you have the ability to put a large lump sum in when the child is born, that’s going to make such a larger difference than playing catch up.”
Even if you’re coming late to the game here, the time to start saving is always now. The money you put into a 529 plan can be used for a number of qualifying education expenses like tuition, books, and room and board. And if your child ends up getting a scholarship, that money isn’t lost. Sydlansky said you can either put their 529 account into another child’s name or pay a 10% penalty on the growth and take back the money.
These types of college savings plans vary from state to state, but some states offer an additional tax benefit. In Arkansas, for example, a portion of 529 contributions are tax-deductible.
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3. Make college savings a priority
Your young child’s college life is kind of like your own retirement; you know it’ll come someday, but it probably feels like a million years away. Melissa Sotudeh, a certified financial planner and director of advisory services at Halpern Financial, said the best way to get into the habit of saving is to make it a line item on your monthly budget. This helps take the intimidation out of such a big financial goal.
“One thing I always remind people is that when you’re saving a dollar amount for any particular goal, always look at trying to increase that by just a small amount periodically,” Sotudeh said.
If money’s tight, you may initially only be able to kick in $25 a month. As you gradually get on more solid financial ground, try increasing your contributions little by little. Automating your efforts also makes college savings a set-it-and-forget-it affair.
“At $25 a month, you’re definitely not going to be able to cover all four years of even a state school, but what you might have is an amount that will bring even a reasonably priced university into the realm of possibility, and lower what potentially the student might have to borrow,” added Sotudeh.
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4. Keep your nest egg out of the equation
It may be tempting to use your retirement fund to pay for your kids’ college, but it’ll cost you. Not only will you pay taxes and a 10% penalty for tapping your 401(k) before age 59½, you’ll also be robbing yourself of future returns.
“Honestly, that’s an awful idea,” warned Sydlansky. “As much as you love your children and want to do right for them and give them opportunities, the bottom line is you can borrow for your child’s college, but you can’t borrow for your own retirement; no one’s going to lend you money at 75 years old when you need money to live.”
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5. Ask family & friends to contribute
When holidays and birthdays roll around every year, don’t be afraid to invite family and friends to play a role in your child’s future.
“What I’m seeing now is people setting up these [529] accounts, then alerting families at gift-giving occasions that they can contribute directly to the plans,” said Sotudeh.
It’s something your child will be grateful for come high school graduation. The ultimate savings goal, according to Sotudeh, is roughly 80% of estimated college costs.
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6. Encourage your child to participate in the process
Teaching your children personal finance basics is never a bad idea. A 2016 Council for Economic Education study found that students who graduated high school in states that mandated financial education were more likely to have higher credit scores at age 22.
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7. Understand future earning potential
Borrowing money for college is a decision that could have lifelong repercussions for your child. Sydlansky recommended sitting down together and mapping out the average salary for their anticipated career path. Once they’re out of school and paying back their student loans, how much will they realistically have left over every month? It’s an exercise that may help motivate your child to participate in the college savings process. This may translate into a work-study program or after-school job to help supplement college costs.
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Most important things to remember
College isn’t free, but saving for it doesn’t have to come at the expense of your own financial well-being. The tried-and-true 529 plan is your best bet for tax-efficient growth over the long haul. Make it a priority by kicking in whatever you can as early as possible. And don’t be afraid to enlist your child, along with family and friends, to participate along the way.
This article originally appeared on StudentLoanHero.com and was syndicated by MediaFeed.org.
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