Today, most parents are saving money for their children’s college education — 72 percent of them, according to a study by Fidelity Investments. But some 68 percent of students still graduate school with student loan debt, at an average of $30,000. Here are three ways you can elevate your savings strategy to help your kid graduate without debt.
Squeeze the most out of your 529
There are two main types of 529 college savings plans: prepaid plans, which are often modeled around costs for in-state public colleges; and savings plans, which operate similarly to a 401(k) and may be managed by a financial adviser. Both prepaid and savings plans are available in state-based 529s.
If your state offers a tax deduction, it’s usually best to go with that plan, says Denise Downey, a certified financial planner in Spokane, Wash. Those savings can be used to increase your 529 contributions, so your child will have more money for college. You can choose another state’s plan, but be aware that those tax incentives may only apply if you invest in your home state’s 529 plan. Be sure to take a close look at the terms of each plan when comparing your options, too. Excessive management or administrative fees can negate your financial gains.
Maximize your child’s federal aid eligibility
After you submit the Free Application for Federal Student Aid, or FAFSA, you’ll get a student aid report that includes your estimated family contribution, or EFC. That determines how much federal aid your child is eligible for. Many colleges use it to decide how much need-based aid to award.
For dependent students, the assets and income of both the student and parents are factored into your EFC, and different transactions can have an impact on your EFC. For example, selling an investment property or withdrawing money from your retirement account early is counted as additional income. That will increase your EFC. And the more money that’s in your child’s name, the less need-based aid he or she may be eligible for.
Since the FAFSA currently uses your tax information from the year before last, you’ll have to make the necessary adjustments to your finances during the first half of your child’s junior year of high school to maximize their federal aid eligibility.
Teach a financial lesson
Saving money for your child’s college education is important, but financial literacy can take your money even further. Deborah Fox, a San Diego certified financial planner, suggests using an allowance to teach the basics of handling money early on. You can take that a step further by offering to give your child a small loan from the “Bank of Mom and Dad” to help them understand what it means to take on debt and repay it. That, she says, is a lesson that will stick.