This spring, college acceptances are a little more unique than usual. The arrival of admission letters is joined by family conversations about how tuition bills will be footed amid an uncertain economic climate. Regardless of the times, paying for college can be a big challenge for students and their families. According to a report from the Federal Reserve, over half of those who went to college took some kind of debt or loan for their education, and in 2017 one-fifth of those adults with debts were behind the payments.
The New York Times noted that parents are taking on more debt than ever to afford their children’s education. Federal loan program limits impede students from borrowing the entirety of their university’s cost, so many parents end up going deeper into debt to pay tuition fees.
While the overall percentage of borrowing by parents has decreased slightly over the years, those borrowing are taking on more debt.
If you are worried about how to pay for your child’s education, here are some alternatives for you to plan the best economic path forward.
Choose The Best School For Your Student And Your Family’s Budget
When your student is applying to universities, ensure that they apply to both public and private schools. Recent data show more students are opting for lower-cost public universities that help reduce the burden of debt upon their family.
While opting for a more affordable school may feel like a tough decision during the excitement of college admissions, the long-term impacts of debt during financially strained times typically far outweigh some of the benefits a private school can provide. Creating a pros & cons list for each university in relation to your family’s budget will likely help you determine the right school for your student.
Divide the Cake into Parts
Sometimes, little steps towards a goal can make it feel more achievable than focusing on the big picture. Tuition payment programs are a good choice if you want to split the cost of tuition into bite-size pieces. These are short-term plans that allow families to pay for the semester or the year of study year by dividing the payment calendar into shorter terms. With this alternative, you don’t get involved in a big loan at the end of your college career, and instead are able to pay month-over-month with smaller payments throughout the year. The majority of U.S. higher education institutions have this option, and typically, you can enroll in this program a few months before the start of the semester. For example, undergraduates at NYU utilizing a tuition payment program pay 50% of the tuition in August, then 25% in October, and the final 25% in November.
Federal Student Aid
Every year on October 1st, millions of students apply for the Free Application For Federal Student Aid (FAFSA). If you are thinking about going to school, this is a key date to have on your calendar. Completing the FAFSA form is an option that every student should take advantage of, every year of their college career. By completing the FAFSA form, your university automatically calculates your eligibility for financial aid. This aid can take the form of grants, work-study, loans, and scholarships.
How Can I Help Plan My College Student’s Finances Now?
If your child is already at their dream school, there are great ways to help them stay on track financially. Create a budget, and track spending consistently. By doing so, you can also project your upcoming expenses. In order to increase savings, consider cutting extra spending. For example, buying second-hand books or borrowing from the school library, instead of buying new books every semester. Another great strategy is to encourage your child to find an on-campus job.
Student Loans: Best Practices for Paying It Off
If you are worried about how to pay off a student loan, you are not alone. According to Forbes, student loan debt in 2020 is now about $1.56 trillion. One way to pay off loans quicker is to increase the monthly payment in order to reduce the principal balance faster. For example, let’s assume you have a loan of $180,000 with an interest rate of 10% for 10 years, of which you pay off a monthly balance of $2,378. If you pay $100 dollars more each month it will decrease the overall payment terms by around 1.25 years and save you $14,634 in total.
If you or your dependent has taken out multiple loans, prioritize paying off those that have the highest interest rates first as they collect more interest, and thus increase the overall amount of the loan due. If you’d rather split your monthly payments up instead of paying a lump sum at the end of every month, you can split single monthly payments up into two smaller payments made twice per month.
Do Your Homework Before Going to School
Don’t panic! The key to having the best financial plan is proper research and due diligence prior to making a big decision. According to Sallie Mae, only 40% of families research college costs and financial aid. Deciding which route is best for you or your child can be a little overwhelming, but there are some great tools on the internet to help assess the options you have. A great resource is College Insight, a data-research tool focusing on “college access, affordability, and success.” The tool allows you to compare universities by selecting filters like affordability, earning and repayment, enrollment, and more. Another great internet tool is Top Universities which allows you to compare information for U.S. universities as well as higher education institutions around the globe.
Time for College
Your child heading off to college is a big accomplishment for you as well! Despite uncertain economic times, a well-structured financial plan can ensure you avoid taking on excessive debt to support your children’s education. Consider solutions including opting for a public university, seeking federal student aid, and choosing a tuition payment plan to reduce the financial burden of college. If you or your child do end up taking on loans to pay for college, focus on seeing it as a long-term investment. Adopting best practices in paying off-debt, while maintaining a responsible financial plan can greatly reduce the worries that come with your college future graduate leaving the nest.
Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Ready to Get Started?
Real financial planning should pay off today and in 10 years' time.