For many families, the path to a college degree is paved with debt. As tuition has increased at more than twice the inflation rate for the past decade, more parents and students are borrowing money to pay the costs of a higher education. The average student loan debt has grown to approximately $23,000 — a heavy burden for young graduates at the start of their working careers, and more than many can manage. Start Saving Soon after Baby Is Born Clearly, college planning shouldn’t be left until the last minute. A growing number of parents are starting to set aside money for college before their children even start kindergarten. If you are interested in saving while your children are young, consider a Section 529 college savings account. Sponsored by states, 529 savings plans offer an opportunity to invest in a tax-favored manner. Plan investment earnings are exempt from federal income taxes if used for qualifying education expenses. You can choose practically any state’s plan because many 529 plans are open to nonresidents, regardless of the college your child ultimately attends. Section 529s have no income limits on contributions, and you can easily change the beneficiary to another family member — a brother or sister, for example — if the child you originally designated as beneficiary never uses the money. You also may want to consider saving for your children’s education in other tax-favored accounts. Your financial professional can discuss your savings options with you. Search for Scholarships When your child is in high school, you may want to begin to search for scholarships. You may be able to find private scholarships that are appropriate for your child on the Internet. Many scholarship committees seek well-balanced students and students with particular interests, not just star athletes and honor students. While your child can apply for, and win, as many scholarships as possible, keep in mind that scholarship money may reduce your child’s eligibility for financial aid. Take Advantage of Tax Credits Once your child starts college, take advantage of any tax credits that are available to you. For 2010, an American Opportunity Tax Credit of up to $2,500 a year per student may be available. A Lifetime Learning Credit of up to $2,000 (per taxpayer return) is also available, but you can’t claim both credits for the same student’s expenses. Eligibility is phased out above certain income levels. Limit Borrowing Even after savings, scholarships, tax credits, and deductions, many families still have to borrow to pay college costs. In general, students shouldn’t have debt payments of more than 10% of their monthly gross income once they graduate. And, in most cases, parents should make sure their total debts don’t exceed 35% of their gross income. Your financial professional can explain your options for saving and paying for higher education expenses for your children.
Higher Education = High Debt?
