Saving for College: 3 Trends to Know
College tuition costs have been steadily rising over the last decade and experts don’t expect the climb to stop anytime soon.
According to student financial website FinAid, children can expect to pay three to four times the current rate when they head to college.
“College is very expensive and has been increasing substantially higher than the rate of inflation,” says Mike Schenk, senior economist for the Credit Union National Association. The recent economic instability and stagnate wages have made it hard for families to save for college. “Sixty percent of the U.S. population is living pay check to check so it’s not possible to put a lot of money aside.”
Families can rely on financial aid including grants and scholarships, federally- backed loans that carry low interest rates and private unsecured loans.
Students taking out loans to pay for their education can apply for the Federal Stafford and Federal Perkins loans which carry low interest rates and don’t require a credit check to qualify. The loans do have limitations and might not cover the entire cost of the education.
Parents of dependent students can also take out government loans to cover tuition. Those who fall into certain income levels may also be eligible for government grants, essentially free money for higher education.
“If you take a loan you want to make very sure it’s the right loan because there’s a big disparity in what’s offered in the marketplace,” says John Convery, retirement advisor of The Educated Wealth Center. “The very best offer is the Stafford subsidized student loan. Students get that loan without any creditworthiness and no interest is charged on the loan proceeds until the student graduates or discontinues the education.”
Credit Unions Enter Lending Game
If federal loans don’t cover all costs, parents and students can turn to the private sector for an unsecured loan. These loans often carry higher interest rates, but experts say it’s better than using a credit card to cover tuition.
Banks have served as the traditional lenders in the private student loan market, credit unions are getting into the marketplace.
“It’s not like you can get all your money through the government. The amount of money is not unlimited so we offer an alternative,” says Schenk.
He says credit unions take a little different approach when it comes to student lending, they tend to require students make a payment each month, which can be as low as $25 while they are in college.
“It gives the student some skin in the game and gets them familiar with the process and helps them understand yes this needs to be paid back,” says Schenk. While the interest rate on these unsecured loans varies in each credit union, Schenk says credit unions have typically been able to offer lower rates than banks.
Saving Always Tops the List
With no slowdown expected in the college arena, parents should work to establish college savings accounts as early as possible.
If a state school seems likely, experts suggest looking into a prepaid college plan--that allows you to lock in the cost of college today and avoid the projected increase in the future. Typically with these programs your child has to go to a school within the state you purchased the prepaid, but Convery says some states are starting to honor out of state prepaid programs. “
“Let’s say a Florida student has a Florida prepaid and wants to go to a state university in Georgia. States are now acknowledging the full dollar credit,” says Convery.
He says prepaid plans tend to offer the best value. “It’s an excellent value no matter how you slice it,” he says. However, he did note that the prepaid does have a disadvantage when applying for federal student aid because the cash value of the prepaid will count as an asset and may make the student unable to get aid.
529s: Know the Risks
A 529 college savings plan is a tax-advantaged plan where money is set aside for future college use. The plans invest the money allowing users to grow the account over time. Because the plans are tied to the stock market, they come with risks.
“With a 529 there’s a great tax benefit if the money is used to pay for qualified (education costs),” says Convery. “If not, there’s typically a 10% penalty on the earnings so you want to be sure the money will be used directly to pay for tuition or room and board.”