Student loans can create terrible burden
Last week I wrote about the importance of having a family discussion about the realities of college costs. The time to do that is when your child starts high school. That’s when you can set realistic expectations about the costs of college, the impact on the family’s finances, and what children can reasonably expect in the way of funding.
The other half of that reality check should start even sooner — with a savings plan. The more you save, the less you need to borrow. September is National College Savings Month. It’s the perfect time to learn how to save for future college expenses.
You’ve seen the dreadful statistics about student loans. There is more than $1.5 trillion in student loans outstanding, far more than credit card debt. After graduation, the burden of repaying those loans keeps young adults from starting the American dream — delaying home purchases and starting a family, and impacting job decisions.
According to the Federal Reserve, nearly 9 percent of student loans are delinquent more than 30 days, despite available help such as income-based repayment plans and other deferral provisions. But eventually the principal and the growing interest burden must be repaid.
Now some parents are seeing their Social Security checks docked for loan repayments on parental PLUS loans. Private loan delinquencies can have even more immediate dire consequences as bill collection techniques vary. Credit reports are ruined, wages can be garnished, and court judgments can result in liens against property.
The message is simple: Student loans are not the easy way out.
The answer is equally simple: Start saving for college from birth. New parents are understandably overwhelmed by financial obligations. But a lot of money is wasted on toys, fast food meals and faster internet connections for games.
Here’s how to save:
Open a 529 college savings plan when your child or grandchild is born. These plans let the money grow tax-deferred, for use at any college in any state for all the basic expenses. Sadly, more than 70 percent of college students graduate with student loan debt, while only 18 percent of children have 529 plans, according to SavingforCollege.com.
Go to www.SavingforCollege.com to learn about your state’s plan, which may offer savings on state income taxes. But you can use any state’s plan, if yours hasn’t performed well. Do the easy online comparisons and then click on the links from this site to immediately open a plan and set up automatic deductions. Money in the plan can be used for any child in the family, so you can set up individual 529 accounts or just parcel out the money from one account.
Be sure to ask grandparents to contribute, giving them the links to set up their own regular contributions or deposit birthday gifts. And if your child has very wealthy grandparents, they can contribute up to $75,000 at one time (five times the annual gift tax exclusion) to set up an account for each grandchild. The money is excluded from their estate.
Money in a 529 is treated as a parental asset and has the least impact if you do ultimately need to apply for financial aid. Avoid placing any money in a custodial account. Money in UGMA accounts is treated as a child’s asset and weighs far more heavily against you in the financial aid formula. (Plus, at age 18 in most states, the child can take control of the account.)
Contemplating huge future college costs can make the challenge seem overwhelming. But a little bit saved, growing tax free, can go a long way over time. And that’s The Savage Truth.