How to Trim Your Family’s Higher Education Budget

The Two Types of Student Loan Debt

Here in the US, the average college student graduates carrying a whopping $37,69 in student loan debt. Students who earn graduate degrees borrow even more: students who hold a Master’s degree have an average of $71,287. Student loan balances for PhDs, lawyers, dentists, and doctors can easily be double that.

The majority of that debt comes from private student loans, rather than federal. Private student loans come with higher interest rates, less forgiving loan repayment options. But student borrowers often choose to take them out because federal loans, which are capped at $20,000, may not cover the entire cost of a college education. The average cost of tuition and fees at a private school is over $38,000 per year. Attending a public college is more economical, with an average price tag of $10,740 annually. In either case, with their lower borrowing limits, federal loans won’t cover the cost of a four-year degree. For many students, private loans are the only way to bridge the gap.

What Does Carrying Student Loan Debt Mean for Families?

We all want to do our best by our kids. And carrying student debt comes with emotional, as well as financial consequences. On average, it takes students about 20 years to pay off their educational debt. That’s 20 years of stress about earning enough to cover payments and making them on time. Sometimes, it’s parents who bear the burden of student loan debt, of course. And in some families, kids and parents share the weight. There’s plenty of stress to go around.

Strategies for Reducing Student Loan Debt

Needless to say, reducing student debt is a goal all families should consider. Many colleges offer need-based financial assistance, but there are countless other opportunities that can help you and your kids pay the way to a college degree. Scholarships and grants are also available from the private and non-profit sectors. From local businesses to Fortune 500 companies like Walmart and Coca Cola to labor unions and faith-based organizations, it pays to do your research on these opportunities. The scholarship landscape changes from year to year so it makes sense to look into free education funding annually. If that sounds a little daunting, there are numerous websites that can help you through that process.

Consider Refinancing

Another effective strategy to consider is student loan refinancing. Private loan interest rates go up and down. The good news is that, presently, interest rates on many types of loans are near historic loans. If your family took out student loans more than a year or two ago, you’d be smart to look into current student loan rates and refinancing opportunities. Between 2020 and 2021, on average, private student loan interest rates fell more than 31%. You might also think about refinancing if your credit score has increased since the time you took out your original loans. Perhaps you’re earning more now and your debt-to-income ratio is more favorable. Or you’ve become more conscientious about making on-time payments. Any of that can make a difference. Lending institutions reserve their most favorable interest rates for the most credit-worthy borrowers. Even a modest jump in your credit score can decrease the interest rates you’re offered. Since student loans tend to have longer loan terms (upward of 10 years), the money you could save over the years by reducing your interest rate is considerable.

Take Advantage of 529 College Savings Plans

If you’re a parent of young children, careful planning can help ease the burden of student loan debt for you and your children. Even if you’re still rocking a cradle or changing diapers, it’s not too soon to begin saving for college. As we’ve seen, there are a lot of costs to cover.

The first 529 College Savings Plan was introduced in 1986.  Today more than 14 million Americans have 529 accounts. The money you save in your account will be invested on your behalf, typically in conservative investment vehicles like mutual funds. Your 529 plan will increase in value along with the stocks nd bonds your plan invests in. Of course, all investments involve risk and you could lose money, too. But 529 plans also earn compound interest and offer a few tax advantages.

While you will pay federal tax on your earnings eventually, your 529 deposits are tax-deferred. Some states do allow you to deduct your 529 deposits from your income each year. And unlike 401Ks and other retirement plans, you can invest as much as you want in a 529 plan and enjoy tax advantages on the full amount.

There are some disadvantages to 529 plans. You don’t have the flexibility of choosing where your money is invested. If you find a terrific stock that’s paying more than your 529 plan, you can’t withdraw funds without accruing penalties. But for many families who don’t watch the market that closely, 529 plans represent a relatively safe, simple way to save to cover higher education costs and reduce their student loan debt.

A Piece of Standard Advice for Parents

Nobody likes to think about it. But if the worst happens and you’re no longer around to provide for your kids, carrying a life insurance policy can pay for them to go to college. Life insurance is extremely important for all parents, regardless of whether they hope their kids will pursue higher education. Pretty much any financial advisor will tell you that, but the wisdom of that advice is plain to see for most parents. Life insurance policies pay a lump sum upon the death of the policyholder. Depending on the policy limits you select, that money can prevent your kids from having to take on any student loan debt at all. What’s more, term life insurance is relatively inexpensive. At age 30, a non-smoker can expect to pay just $33 per month for coverage.

The Bottom Line

College is expensive. But over the long haul, not having a degree is expensive, too. College degrees confer much greater earning power. Holding a Bachelor’s degree can increase your children’s lifetime earnings by as much as 75%. So the question is not whether to send your kids to college, but rather how to take some of the financial pain out of doing so. Many reputable online resources are available to help your reduce your family’s education expenses. Be proactive and get started on saving today.

Author Bio:

Susan Doktor is a journalist, business strategist, and principal at Branddoktor. Her article comes to us courtesy of Money.com.  Follow Susan on Twitter @branddoktor.