How to Help Your Kids Prepare for College — Without Student Loans

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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Student loans get a bad rep, but for many, they represent the only way to pay for college. It’s the ultimate catch-22. Still, one in three borrowers actually regret taking out student loans, and it isn’t all that surprising that 46% of millennial borrowers don’t want their kids to end up in the same boat.

The silver lining? There are other ways to finance college — you just have to know where to look. Here are some insider hacks for helping your kids prepare for college without student loans.

Be smart with your savings

Melissa Sotudeh, a certified financial planner and director of advisory services at Halpern Financial, said the best way to get into the habit of saving is to make it a line item on your monthly budget. Wherever you start, try increasing your contributions periodically as you gradually get on more solid financial ground.

“At $25 a month, you’re definitely not going to be able to cover all four years of even a state school, but what you might have is an amount that will bring even a reasonably priced university into the realm of possibility, and lower what potentially the student might have to borrow,” Sotudeh told Student Loan Hero.

Consider these powerful savings vehicles.

529 plans: When it comes to bulking up your kids’ college funds — and cutting your dependency on student loans — the 529 is by far your best option. It allows you to put away money for college that will grow tax-free. You also won’t be hit with taxes when the time comes to cash in.

“If there’s anything I can stress to parents, it’s the earlier [you start contributing] the better, because the longer you have the money in there to compound is a tremendous advantage to you as a parent,” said Paul Sydlansky, a certified financial planner and founder of Lake Road Advisors. “If you have the ability to put a large lump sum in when the child is born, that’s going to make such a larger difference than playing catch up.”

The money you put into a 529 plan can be used for a number of qualifying education expenses like tuition, books, and room and board. And if your child ends up getting a scholarship, that money isn’t lost. Sydlansky said you can either put their 529 account into another child’s name or pay a 10% penalty on the growth and take back the money.

These types of college savings plans vary from state to state, but some states offer an additional tax benefit. In Arkansas, for example, a portion of 529 contributions are tax-deductible.

IRAs: Your retirement savings are, well, for retirement. But if you’re in a pinch, Individual Retirement Accounts (IRAs) could help your child avoid student loans. Under normal circumstances, pulling money out of a traditional IRA before age 59 1/2 translates to a 10% penalty. You’ll also be on the hook for paying taxes on that money. Roth IRAs are different in that they’re funded with after-tax dollars, so you can actually withdraw your contributions at any time, tax-free — unless you tap your earnings early, in which case you’ll be slapped with a 10% penalty.

For both accounts, you can sidestep this penalty if you use your distributions for qualified higher education expenses including tuition, books, supplies and room and board. You just have to spend it on yourself, your spouse, your kids or your grandkids, and the student has to be enrolled in a degree program at least half time.

IRAs have one other built-in benefit: If your child scores enough in grants and scholarships and you don’t need your IRA to pay for college, you’ll have more money left over for retirement. Unlike 529s, you won’t have to pay a penalty to draw on those funds for non-education expenses later down the road.

Regular savings accounts: You won’t earn the best return parking your kids’ college cash in a regular savings account; the highest yield you can expect these days is 2.25%. You’ll also miss out on the tax benefits of a 529 or IRA. However, there is one major perk — you can access it whenever you want penalty-free. And if you’ve been steadily contributing to it over the course of many years, chances are you’ve built up a solid stockpile of cash that can be used for any college expenses you want. No restrictions.

Coverdell ESA: If you earn less than $110,000 per year ($220,000 if you file your taxes jointly), a Coverdell Education Savings Account (ESA) can help maximize your savings efforts. You can contribute up to $2,000 per year, which will grow tax-free. You also won’t be taxed on distributions, as long as you don’t withdraw more than your child’s education expenses. But if you tap this money for non-qualified expenses, you’ll have to pay income taxes on the earnings and a 10% penalty. Since the contribution limit does cap out, Coverdell ESAs might make for a great supplementary savings vehicle that you kick into on top of, say, a 529 plan.

One other note: The money must be used within 30 days of the beneficiary’s 30th birthday. If not, you’ll have to take a non-qualified distribution of the leftover money. To avoid this, you could change the beneficiary to another sibling or relative, or roll the money over to a 529 plan, which doesn’t have an age limit. (FYI, the age limit doesn’t apply to special-needs beneficiaries.)

Hunt for grants and scholarships

There’s nothing better than free money. Grants tend to be gift aid that’s based on financial need. Scholarships, on the other hand, are usually merit-based. Mark Kantrowitz, publisher and vice president of research at SavingForCollege.com, said the best place to find them is online. (Fastweb is one of his favorites. You can also find a comprehensive list of sites here.)

“Focus on free,” he told Student Loan Hero. “If you have to pay money to get money, it’s probably a scam.”

The internet isn’t your only resource. Kantrowitz pointed to your high school counselor’s office or college financial aid office as a great place to search for scholarships. The same goes for private organizations. The Florida PTA, for example, doles out $2,000 scholarships to qualifying high school seniors.

Encourage your child to participate.

Opt for AP courses or dual enrollment opportunities. Advanced Placement (AP) courses allow high school students to take college-level classes, essentially reducing their future college course load — and shaving their tuition costs. To actually earn college credit, the student usually has to score a three out of five on each AP exam, which costs $94 a pop. AP requirements vary from high school to high school.

Dual enrollment is another option that lets students take college classes while still in high school. Requirements, which usually include a GPA minimum, are often set by the high school and the state.

“One benefit of dual enrollment is you can use 529 money to pay for some of the cost, whereas AP tests you can’t,” said Kantrowitz.

Dual enrollment courses can cost up to $400. Just be sure to check with the college you plan on attending to see if your dual enrollment or AP credits will indeed transfer over.

Consider part-time work.“If you want to reduce your debt, the best way to do that is winning scholarships and saving for college,” said Kantrowitz. “Every dollar you save, and every dollar you win, is a dollar less you’ll have to borrow.”

In other words, every little bit helps. Socking away your earnings from a part-time job certainly won’t cover all your college expenses, but it could make a nice little dent. Some companies even offer tuition assistance. For part-time employees, Aetna will pay up to $2,500 for courses that are for a degree program or otherwise related to your job or career.

Fill out the FAFSA. The earlier you fill out the FAFSA (Free Application for Federal Student Aid), the better. Many colleges and states use it to grant financial aid. In fact, roughly 75% of full-time students end up receiving grant aid to help pay for college. Kantrowitz said that grants are generally considered gift aid that’s based on financial need, so your FAFSA should be at the top of your to-do list.

Teach basic personal finance

The best way to foster financial independence is to actively teach it to your kids. A 2016 Council for Economic Education study found that students who graduated high school in states that mandated financial education were more likely to have higher credit scores at age 22.

For younger kids, Sotudeh recommended teaching them the concept of spend/save/give. Whether they receive four quarters or $100 — spend some, save some and donate some. It’s an exercise designed to reinforce delayed gratification and curb impulsive spending.

“To teach [high school kids] about credit cards, I’d show them how much more something costs if they have a credit card and what the percentage is versus paying for it now,” she said.

Budgeting is the other side of the coin. Sotudeh suggested sitting down with your kids as soon as they begin earning an allowance or money from an after-school job. How much are they bringing in? Do they have any bills? The idea is to lay the foundation that you can’t spend more than you make; something that’ll come in handy once they’re living on their own.

When they’re preparing to leave the nest for college, crunch some numbers with them so they can see exactly how much further their money will go with a little financial forethought. Buying used textbooks, meal planning and carpooling to class can help them stretch their cash during college and beyond.

Consider community college and state schools

On average, full-time students at public two-year colleges receive more than enough grant aid and federal tax benefits to cover tuition and fees, according to the College Board. Beginning your higher education journey at a community college and knocking out those general education requirements before transferring to a state school could be a powerful way to reduce your college expenses.

If you’re set on going directly to a four-year university, Kantrowitz recommended setting your sights on an in-state public college. “You can get just as good a quality education, but for a quarter to a third of the price of a private four-year college,” he said.

Ask friends and family to contribute

Don’t be afraid to invite family and friends to play a role in your child’s future. “What I’m seeing now is people setting up these [529] accounts, then alerting families at gift-giving occasions that they can contribute directly to the plans,” said Sotudeh.

It’s something your child will be grateful for come high school graduation. The ultimate savings goal, according to Sotudeh, is roughly 80% of estimated college costs. Another option is turning to crowdfunding. Search for “college funds” on platforms like GoFundMe and you’ll see thousands of campaigns.

Setting up one for your child directs friends and family to an easy way to donate.

The bottom line

College grads are burdened with more student debt than ever before. Sixty-nine percent of 2018 graduates took out student loans to help cover the bill, and their average debt came in at $29,800. The upside is that scholarships and grants can greatly reduce your debt burden.

Smart saving is equally important, as is getting your children involved.

Paying for college isn’t cheap, but some intentional thinking can go a long way in breaking free from student loans.

Need a student loan?

Check out our top picks below or learn more about other ways to pay for college.
Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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