College has never been more expensive than it is today. The average annual cost of tuition and room and board in 2019-2020 was $30,500. And tuition prices are only getting costlier every year, evidenced by the student loan crisis in the United States. Some 44 million people in the U.S. have about $1.3 trillion outstanding student loans.
How can you plan ahead and avoid taking on exorbitant student loan debt? Start thinking about paying for college today.
Saving for College
It’s a falsehood that only the wealthy save for college. Families can begin thinking about paying for college by putting together an education savings budget. For starters, go online and plug in your information into a college savings calculator to get an idea of what you will need to save to pay for a degree.
To save for college many parents opt for 529 plans, which is an education savings account that provides tax deductions. The benefit of a 529 plan is that the money increases tax-free. And you can save for your child, niece, grandchild or anyone in your family. Contribute up to five-years worth of savings without paying gift taxes. Let your family know about your 529 plan so they can contribute birthday or holiday money there instead of buying gifts.
While it’s always better to start saving earlier rather than later, opening a 529 plan for a high school student is also valuable. The plans are sponsored by states, but students can take their money to any out-of-state college. There are no taxes assessed when the money needs to be accessed for college. Choose from either a 529 savings plans, which will grow based on your investment options, or open a prepaid plan that allows you to pre-pay all college expenses.
To enroll in a 529 plan, contact your financial adviser or get in touch with a 529 plan manager.
Best College Student Loans
Very few students have the liquid cash to pay for college in full without taking out loans or needing scholarships. Before applying for private or federal students loans, see how much money you can get in scholarships and grants. The best part is: You won’t have to repay scholarships or grants, which makes these funding options ideal. Prepare your child to win scholarships early in their schooling by encouraging them to get good grades and be active in the community.
Your next option – after using cash, grants and scholarships – should be federal loans. Federal loans have flat interest rates and income-based repayment plans. Students who fill out a FAFSA and show that they have the financial need are eligible for Direct Subsidized Loans, which had a fixed rate of 4.53% for the 2019-2020 school year.
The maximum loan amounts under the subsidized and un-subsidized loans are a combined total of $5,500 as a freshman, $6,500 as a sophomore, and $7,500 junior and senior years. The aggregate loan maximum is $57,500 for undergraduate students and $138,500 for graduate students.
Consider all of your federal loan options before you take out private loans through a bank or credit union. Only turn to private loans once you’ve exhausted all other options. The interest rate on a private loan will depend on your credit score.
Other Funding Options
Also consider tuition waivers that are offered for teachers, veterans and dependents of college employees. To help with the cost of college, students may want to also considering working part-time or enrolling in federal work-study program.
Thinking about the costs of college can be overwhelming. But a college degree should be considered an investment. Getting an education matters, especially in terms of your future salary. The median weekly earnings for a person with a doctoral degree is $1,623; $1,341 for someone with a master’s; and $1,137 for a person holding a bachelor’s degree, according to the U.S. Department of Labor. The facts show that when you have a college degree your earnings will be higher than someone with only a high school diploma and your chances of unemployment are lower. Getting an higher education still pays off in the long term.
Still have a question about paying for college? Let us know in the comments section and we will get you an answer from one of the many student lending experts at AAA Northeast.
For more on student lending from AAA, go to AAA.com/StudentLending.