College Costs 101: The Basics

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71% of all college students (about 1.3 million) who graduated in 2012 had some form of student debt

The average debt load of each student was $30,000

In 2014, student loan debt in America surpassed $1 trillion total. It is now second only to home mortgages as the largest single contributor to consumer debt.

College-Savings_22-Dec-2014These are scary and overwhelming statistics. The type of statistics that keep the parents of teens and college students up at night.

However, those of us with younger children are often content to ignore these figures despite what could be a mounting expense in the not-too-distant future. If, like me and my husband, you have young children, a relatively-new mortgage, a still-developing career, and your own college loan payments to manage, the prospect of actually saving for your kids to go to college in a dozen or more years is not likely on your radar. However, the entire concept of couponing, saving, and stretching income, by definition, should account for more than the “here and now” expenses if it is to have a lasting impact on your family’s financial health.

Parents of young children, and even older ones, need to think now about contributing to their children’s educations. This means understanding the benefits of college planning now and in the future.

Borrowing versus Saving

A lot of people figure that borrowing later is just as easy as saving today. But I don’t need to show you my own student loan payment stub to tell you that the burden of borrowing for college is more than just a temporary expense.

There are very real cost benefits to saving for college now versus borrowing in the future. Consider this little game of numbers – a parent who puts away $200 per month for his child’s college education will, over the course of 10 years, save $24,000, and this doesn’t even account for interest rate growth over that same period of time.

On the flip side, at the current 6.8% rate of interest for federally-subsidized education loans, the cheapest way to borrow for college, borrowing that same $24,000 and paying it off over 10 years will saddle your son or daughter with a monthly payment of about $330 post-grad.

Even if you have them pay you that $200 a month back, you save them $130 a month…or $15,600!

The Benefits of a 529 Plan

When ready to start saving, most parents opt for a 529 College Savings Plan which is simple to set up and offers a host of benefits both now and in the future.

  1. As the owner of this plan, you, not your child retain control of it for the duration of its existence. You get to say when, for what, and how much of the money is used. And, if you choose, you can retain the money.
  2. Once you are ready to use it, income from a 529 College Savings Plan is not subject to federal income tax so long as it is used for qualified educational expenses. That means, from a federal standpoint, interest earned is free money. Many states also follow this practice.
  3. Finally, in the short term, many states offer residents immediate tax breaks for 529 contributions. This usually means a direct deduction in gross income for the amount contributed to a 529 Plan, up to a certain level. For example, in New York, parents can deduct 529 contributions for up to $5,000 off of a single or $10,000 off of a joint tax return.

Planning for College Costs

Regardless of the methods that you choose to use, setting up some means of saving for college and hence planning for the expense, has a number of tangible benefits to parents and children according to the most recent Sallie Mae “How American Pays for College” survey (2014). They include:

  • More college options with less regards to cost
  • Less need for cost-cutting measures (i.e. living closer to home, accelerated coursework, reduced spending)
  • Borrowing less money overall

As the New Year approaches and you begin to think about resolutions, budgets, and making 2015 better for yourself and your family financially, considering college expenses, even those over a decade away, is a prudent move that has a number of real lifestyle and cost benefits for you and your children.