Let's face the facts: higher education is expensive, more now than ever before. In fact, going to college continues to become more costly each year. However, no matter how difficult it may be to afford, the long-term benefits of a college education are substantial. Pursuing higher education shouldn't be something young people and their families are afraid of financially. But the question still looms large for many families: Can we pay for college?
Student Loan Debt Continues to Rise
More and more, the answer is to take on student loan debt. According to the Federal Reserve Bank of New York, 43 million students are now borrowing money to pay for college, as reported by Reuters. That number jumped a staggering 92 percent from 2004 to 2014! Even more shocking, the average balance is $27,000 and student loan debt is the second largest type of household debt after mortgages.
Higher education is an investment in the future, and a college degree continues to provide higher earning potential and better job options. So even though the numbers can be intimidating, many students push forward and pursue their educational ambitions. While student loans may be unavoidable in some cases, there are other ways for students and parents to approach this investment in their future.
Smart investing, pre-planning and saving, or alternative loan options are a few of the ways to face financial concerns and still give prospective students what they need: a college education.
Financing Higher Education the Smart Way
Luckily, today's students and their families will find numerous solutions for both planning ahead and paying for college right now. Take these four options into consideration:
1. 529 College Savings Plans
According to CollegeData.com, a 529 College Savings Plan is one of the best decisions to make if you are planning ahead for educational expenses. It allows annual investments that are generous, so parents (or other family members) can set aside a significant amount of money for college over a number of years. Funds are not taxed and a 529 account does not impact financial aid awards as much as other types of funding may.
Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. There are exceptions to the gift tax and estate tax exemptions, so please contact a qualified tax, legal, or financial advisor for more information prior to investing.
2. IRA Accounts
Parents with either a traditional or Roth IRA may be able to tap into those funds to contribute towards their child's college tuition. For parents just starting to look at investment options for their young child, IRAs can be an excellent option. Although they are retirement accounts, the funds can be withdrawn for college expenses. If you plan to deduct from an IRA for college expenses, make sure that is included in your calculations early on so you don't unintentionally compromise your retirement savings.
3. Tax Breaks for Education
CollegeData also offers information about Tax Breaks that can help contribute towards educational expenses. Tax deductions for tuition or fee payments can take a small chunk out of your overall expenses, and student loan interest is also tax-deductible. A number of credits are available as well, including the American Opportunity Credit and Lifetime Learning Credit. There are income limits and qualified expenses to take into consideration, so do your research or speak with a qualified financial planner before taking these credits for granted in your budget.
4. Borrowing Options
If pre-planning isn't an option, students may need to consider borrowing money, as the majority of today's college students do. Subsidized student loans, federal Plus loans, and unsubsidized loans are all options for the student borrower. Out-of-the-box options may include home equity loans or personal borrowing from private lenders, although consulting with a financial professional is a good idea when considering any off-the-beaten-track solutions.
College Selection Matters
The benefits of a college education are simply too important for students to miss. For that reason, students who cannot qualify or do not want to pay for college through loans should consider more affordable schools. Certain state colleges and even community colleges can offer the benefits of higher education without the additional costs for student housing, meal plans, etc… Grants and scholarships are readily available from most schools, and are often based on educational qualifications. If you anticipate a need for merit-based financial aid, be sure to study hard!
The bottom line is that a college education will greatly contribute to your career options and financial goals in the long run, so while costs may seem prohibitive, higher education is worth it. It is an investment in the future that you will be glad you made!
How did you approach the challenge of financing higher education? Share your strategies by tweeting @Lindsey2Wealth!