At this moment, more than 45 million borrowers owe nearly $1.6 trillion in student loan debt, and student loans are the second biggest type of debt in America.
The average monthly payment on a student loan is just shy of $400. Think about that. Four hundred dollars a month is a pretty big deal to a recent graduate, who might not be making much money. In fact, as of around this time last year, the average starting salary for a recent graduate was roughly $51,000. After taxes, that’s a take-home of $38,000 a year, give or take. And just a bit over $3,000 a month. Now your recent grad is expected to hand $400 of that over in student loan debt? That’s about 13 percent of their take-home salary.
Of course, student loan debt doesn’t only plague young adults. The average payoff period of student loans ranging from $20,000 to $40,000 is about 20 years so a college graduate could be in her forties by the time that loan is paid off. That loan will be on her shoulders through her wedding day, and possibly through her first couple of kids. It could even be the reason she barely qualifies for a mortgage.
If these numbers and concepts are scary, well, that’s not quite the intention, but it is important to understand that student loan debt is no small deal. And if there is any way to eliminate or minimize it for your children, do it. We spoke with two experts – Rianka R. Dorsainvil, co-CEO of 2050 Wealth Partners, and Sonia Lewis aka The Student Loan Doctor – about how you can help your kids graduate college with no (or little) debt.
Considering online college
“We’ve had a lot of clients really thinking about the worth of a traditional degree, given the virtual transformation of learning,” says Dorsainvil. Though the survey was small and may not have been very far-reaching, one quick poll found that only 57 percent of parents of college students planned to have their child return to the same institution this fall.
Why are parents so hard on online classes?
What is a parent’s main issue with online classes? The high tuition fees aren’t worth it for remote learning. Keep in mind that expenses related to a brick-and-mortar location are often baked into tuition (like salaries teachers require to travel to the campus, and the upkeep of the campus). So, is it fair to pay those fees when your child is learning from her childhood bedroom? Furthermore, research done at a Historically Black College found a much higher withdrawal rate for students taking online versus in-person classes, so one can understand parents’ concerns.
A merciful investment account
“While we continue to grapple with that unknown, we’re advising clients to diversify their savings plans to help them better pivot in the years to come,” says Dorsainvil. She brings up a 529 Plan, which is designed to help with education expenses because withdrawals can be tax-free so long as the earnings are used for qualifying educational expenses.
529s are versatile too
Not only are 529s easy on taxes (taxes are deferred until earnings are withdrawn and there may be no taxes if the money is used for school), but they’re also versatile. You can transfer the beneficiary of the account from one child to another, or even to one of the parents, should the parent choose to return to school.
A bit more on a 529 Plan
Sonia Lewis informs us that 529 Plans can be used for more than just college tuition. In recent years, a law passed allowing one to use 529 earnings to pay for qualifying expenses for K through 12 education. Under the plan, you can use up to $10,000 in earnings from the plan per year, per beneficiary, for K through 12 tuition expenses.
Pre-paying for college
The 529 plan can also be used to pay for college tuition in an unexpected way. “There are two types of  plans: savings and prepaid tuition accounts,” explains Lewis. “A prepaid plan allows the parent to prepay for their child’s college tuition in advance at select colleges and universities.” The prepaid plan, like the savings plan, is tax-advantaged.
Why pre-pay for college?
When your child gets into a higher learning institution, the school will send you a bill breaking down that year’s upcoming tuition. But, that’s not necessarily what you’ll pay every year. Inflation occurs and tuitions rise. If you pre-pay for longer periods of your child’s education, in advance, using your 529 plan, you can “lock in” a tuition rate, protecting yourself against the future rising costs of tuition. Note, beneficiaries using it must attend either an in-state public college or university – but there are a select few private universities that accept the plan.
Using your 529 to pay off debt
“Fun fact: as of 2019 up to $10,000 can be used to repay student loan debt of the beneficiary,” says Lewis. A law recently passed allowing one to use 529 savings to pay off some student debt without incurring the 10 percent penalty. Note, the limit for non-penalized withdrawals for this use is $10,000, per lifetime, per beneficiary. So, a family with three kids could withdraw up to $30,000 between them – $10,000 each – without paying a penalty.
Benefits of a brokerage account
“This account (brokerage) is more flexible with respect to the assets,” says Dorsainvil. “While opened in a parent’s name, and earmarked for a child’s education, funds could be transitioned to a down payment on a home if they receive scholarships. This account does, however, require taxes being paid each year on interest and dividends, if applicable.”
UTMA stands for Uniform Transfers to Minors Act and UGMA stands for Universal Gifts to Minors Act. These accounts can be opened by a parent, in a child’s name. The parent can make contributions, so the funds can grow for their child. The benefit behind these types of accounts is that they allow an adult to transfer funds to a minor without establishing a trust. Furthermore, because the funds are in the child’s name, they are taxed at the child’s income rate – which is typically much lower than the parent’s. The first $1,050 in earnings are even tax-free. The main difference between the two is that the UTMA allows the funds to mature longer before being transferred to a beneficiary (25 years of age), while the UGMA must be transferred at 18 years of age.