How to Pay for Your Children’s Education

    Most Americans dream of a college education, but paying for it has turned into a real nightmare.

    Over the past decade, the cost of college is up about 42 percent for public and 31 percent for private schools, according to the National Center for Education Statistics. Given those escalating costs, it’s hardly surprising that of the 20 million Americans who attend college, 12 million of them (60 percent) borrow money to pay for it. Americans now owe more than $1 trillion in student debt.

    Soaring higher education costs have created a great deal of angst among students and parents, who want a diploma, but not the debt that often comes with it. A study done by Fidelity Investments found that 70 percent of the graduating class of 2013 will have an average debt of $35,200 that includes state, federal and private loans, and other debts owed to families and credit cards.

    Even more daunting is the cost to parents, who may dip heavily into retirement savings  or take out loans themselves to get their children through school.

    The issue of paying for your child’s college education is a difficult one, but there are avenues you can pursue that can help reduce the stress on both parents and students, including college savings plans, grants and scholarships, and loans.

    Start Saving Early with a 529 Plan

    The best time to start working on paying for your child’s college education is shortly after the child is born. If you are secure with the contributions you make to your retirement account and can afford to put aside some money on a regular basis, a 529 Savings Plan may be a practical way to pay for college. With 529 plans, you don’t have to pay taxes on the money the account earns, as long as the proceeds are used on college-related expenses like tuition, books, room and board.

    Another attractive aspect of 529 Plans is that you don’t have to invest in the one run by your state; you can invest in any state plan. In other words, if you live in Texas, you can invest in Minnesota’s 529 Plan and use it to attend college in Texas or anywhere else in the country. It should be noted that you typically get a better tax deduction by investing in your own state’s program, which could save you $1,000 a year.

    The 529 Plans differ in every state, and some states have multiple plans. Each state usually has an administrator who runs the fund and handles the accounts. You also can find 529 Plans sold directly to you without an adviser, if you are confident in your ability to choose investments.

    A 529 Plan obviously is most successful when you are able to make steady, consistent contributions to it.  If your child was born this year, for example, and you put away $100 a month in a conservative investment, that child should have between $35,000 and $40,000 available when they leave for college.

    Some issues you need to be aware of with 529 Plans:
    • They do not affect your child’s ability to receive need-based financial aid as a freshman. If you use the funds to support your child that first year, however, the amount you spend must be accounted for when filling out the FAFSA form for their next year in college.
    • There is a penalty if you take money from the 529 funds for non-educational needs. You must pay income taxes on the money, plus a 10 percent penalty. The exceptions to this are if your child receives a scholarship, becomes disabled or dies. In those circumstances, you can withdraw the money without penalty.

    Coverdell Education Accounts and Prepaid Tuition

    A Coverdell Education Account is similar to a 529 Plan in that the money earned is tax-free as long as it used for school-related expenses. The bonus for going with the Coverdell Account is that the money can be used for K-12 education as well as college education. The 529 Plan is only for college-related expenses.

    The drawback of the Coverdell is that contributions to a student’s account can’t exceed $2,000 a year, regardless of how many people contribute to the account. If the amount exceeds $2,000 in one year, the student will be penalized.

    Prepaid tuition is another option, though it has some drawbacks. The appeal is that you get future tuition prices at today’s rates. Typically, you pay a set amount – either in a lump-sum payment or over a number of years – and your child’s tuition is set, regardless of when they go to college.

    The downside is you are loaning the state your money for the right to lock in a fixed tuition rate. Unfortunately, in some states the rates charged for the prepaid plan already exceed current tuition levels. That could be why only 11 states still offer the plan.

    These are the 11 states that still offer prepaid tuition plans:
    • Florida
    • Illinois
    • Maryland
    • Massachusetts
    • Michigan
    • Mississippi
    • Nevada
    • Pennsylvania
    • Texas
    • Virginia
    • Washington

    Fill Out a FAFSA form

    Once your child enters his or her senior year in high school, filling out the Free Application for Federal Student Aid (FAFSA) is the best place to start work on financial aid. FAFSA uses financial information such as tax returns, bank statements, investments, property and other assets to do a “need analysis” that tells students and family what their Expected Family Contribution (EFC) is going to be for college.

    Nearly every college and university in the United States uses the FAFSA in arriving at financial aid decisions. The difference between the actual costs (as determined by the college) and the EFC, is the amount of financial need. Schools are not forced to offer any aid, but they may offer grants, loans or a work-study program to cover the financial need.

    Find a Scholarship

    Scholarships are by far the most preferable form of financial aid. There is $112.3 billion available in grants and scholarships – otherwise known as “free money” – to help pay for college.

    Most grants and scholarships are based on financial need, merit or both. Nearly all of them require a FAFSA form to be considered. The most common one is the Pell Grant, a needs-based federal program that provides up to $5,550 per school year. There are thousands of other grants handed out by colleges, state governments, civic and religious organizations and even individuals. Go to sites like,, and to find something that fits your child’s profile.

    While it’s true that most scholarships require a great SAT score or grade-point average, there are some that award grant money based on skills or creativity. For example, the winner of the David Letterman Telecommunications Scholarship is selected based on creativity. The value: $10,000. The Duck Brand Duct Tape Stuck at Prom contest winners split $10,000 between the winning couple that wears duct tape outfits and accessories to their high school prom. Check out the Smart Student Guide to Financial Aid or go to Unusual Aid for more unusual scholarship awards.

    Take Out a Loan

    If you have to have money to send your child to school, taking out a loan is the most available resource. In 2012, there were 2.2 million parents taking out loans to pay for their children’s college.

    The cheapest place to start is with the three federal government loans, Stafford, Perkins and Direct Plus. The Stafford loan program is the largest and has the lowest interest rate. Perkins loans are need-based, and students can borrow up to $5,500 a year for five years at a fixed interest rate. Direct PLUS loans are for credit-worthy parents to help pay for their child’s college education.

    If you have exhausted government loan sources, you could apply for private loans from banks or other lending companies, but those generally carry a higher interest rate and more difficult repayment conditions.

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    Make Your Child Pay

    Making your son or daughter pay for college is by far the least attractive choice for the student, but it is one that might be the best for the family overall. A recent study found evidence that as parental aid increased, a student’s grade-point average fell. The steepest curve, according to the study by the University of California-Merced, was among the most privileged students.

    So it could be that by making difficult but sound financial decisions, parents can teach their children the same thing and both sides emerge better off for the experience.

    Cecillia Barr

    Cecillia Barr is a graduate of the University of Central Florida. She blogs about her extensive knowledge on student loans in order to help others reduce their debt and live financially independent lives.

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