How To Minimize Your Child’s Student Loan Debt
Do you have a minor child? If so, are you worried about how they'll be able to go to college without the burden of too much debt? Here are some ways to reduce the burden of student loans on your children:
Assuming you have no high-interest debt, an adequate emergency fund, and are on track for retirement, it can't hurt to start putting some savings away, especially if your child is still young enough to benefit from years of savings and investment earnings. You can use this calculator to estimate how much you’ll have to contribute towards the cost of your child’s education and this calculator to estimate how much to save towards your goals. Once you’ve decided how much to save, check out this breakdown of the pros and cons of 529 savings plans and other tax-advantaged ways of saving for college.
2) Encourage your child to take AP classes.
If your child's high school offers Advanced Placement classes, they can be a great way to earn college credits in high school while possibly improving the odds of receiving merit-based scholarship money. In some cases, your child may not even have to take an AP exam to get college credits. When I was in high school, I was able to get 6 SUNY credits for my French and English AP classes without taking the AP exam and then transfer them to NYU.
If your school doesn't offer an AP class in a subject that your student is particularly strong in, see if they can take the exam anyway. I was able to get credits by taking the AP History and Government exams even though my school didn't offer those classes at the time. Together, this allowed me to graduate in 3 years and save a whole year's worth of college expenses and get an extra year of earnings and work experience.
3) Get money out of your child's name.
That's because about 20% of the money in the student's name is assessed for financial aid eligibility (except for retirement account balances, but any withdrawals are counted as student income) as opposed to a maximum of 5.64% of assets in your name. If that doesn't scare you, keep in mind that your child can spend that money however they want once they reach a certain age, depending on your state. Just be sure to use that money for their benefit on things like a car or a computer for school before you complete the financial aid forms.
4) Compare net costs.
It's easy to get sticker shock when looking at the annual costs of many schools but hardly anyone pays list price anymore. For a better basis of comparison, you can use the school's net price calculator to estimate what the cost will be after factoring in financial aid eligibility. Don't be surprised to find that an expensive private school with lots of money for aid may actually cost you less than a state school.
5) Choose value.
Once you know the costs, shop for a college just like anything else: look for value. It's unclear to what extent the higher earnings of graduates from top schools have to do with the school vs. the student. For example, a famous study by Stacy Berg Dale of the Andrew W. Mellon Foundation and Alan Krueger of Princeton found that students who attended more selective and less selective schools earned about the same when you compared students with similar abilities and ambitions. In other words, if your child is good enough to get accepted to Harvard, they'll probably earn the same higher income even if they attend a lower cost but less prestigious school instead.
There are a couple of exceptions to that though. The same study did show higher payoffs of attending more selective schools for students from financially disadvantaged backgrounds. A lot also depends on what your child wants to do. If they want to go into a field like investment banking or management consulting, a more prestigious degree can pay off as many employers only recruit from top schools. On the other hand, it may not pay off if they want to become a teacher or start their own business.
6) Consider a community college start.
If even the net costs are too high, another option is for your child to start at a community college and then transfer to a 4-year school for the degree. This can save not only tuition (many cost less than $2k for a full-time semester) but also room and board as your child will likely be commuting from home. If they do well at the community college level, they may also be able to transfer into a better school than they would otherwise have gotten into. That's a win/win solution.
7) Explore alternatives to student loans.
In addition to the college's financial aid program, you might want to search for other scholarships online. Most of them are based on talent, academic merit, or association with a particular group, but there are also some offbeat ones so you never know what you could find. Just be wary of paying a fee to a scholarship search service for something you can do yourself.
If you're fortunate enough to have equity in your home and good credit, a home equity loan is one way to help pay for your child's education. The interest rate is generally much lower than a student loan. However, you're putting your home on the line if you can't make the payments.
Another option might be to borrow from your retirement plan through your employer since the interest just goes back into your account. That doesn't make it free though. You lose any earnings that money would have gained and if you leave your job, anything you don't pay back within 60 days may be considered a withdrawal and subject to taxes plus a 10% penalty if you're under age 59 1/2. These loans also typically need to be paid back in as little as 5 years so the payments could be quite steep.
Finally, if you have an IRA or a retirement plan that can be rolled into one, you can use the money to pay for your children's qualified education expenses without penalty, but there are a few caveats. First, make sure you don't need this money for retirement. After all, they don't award financial aid for that. Second, with student loan interest rates still relatively low, there's a good chance you'll earn more by keeping the IRA money invested than your child will pay in student loan interest. Finally, keep in mind that you'll still have to pay taxes on it so you might be better off waiting until you're in a lower tax bracket in retirement and then using the money to help your children pay off their student loans.
8) Encourage them to work.
It could be a good idea to have your child get some skin in the game. Working can teach students the value of a dollar and how to budget. It also provides valuable experience that can even lead to a full-time position after college. I know that in my case, my future employers in the financial world were much more interested in my success selling cutlery in people's homes while I was in college than they were in my economics degree. Some employers even offer tuition assistance for part-time employees.
College may be increasingly expensive but that doesn't mean your child has to go deep into debt or even that you need to kill yourself saving to fully fund their education. Fortunately, there are a variety of ways to reduce education costs or supplement savings with other resources. It's too bad they don't teach that in college!