With the exponential increases in college tuition, it's almost impossible to pay for school without debt. Should parents foot the bill? Learn more with Sootchy.
Although not necessary for every discipline, a college degree is nonetheless a requirement for participation in most corners of the modern job market, and despite the fact that the cost of college tuition has risen far faster than wages, families are still expected to figure out some way to get their kids through school. A variety of financial tools are employed to achieve this goal, including savings accounts, investment portfolios, and the ever-popular 529 plan, but none of these options address the fundamental question, “Should parents pay for their child’s college?” Given the cost involved, it’s an understandable query, so keep reading as the team at Sootchy explains what it would take to cover the expense of college tuition and how parents might be able to do so.
As the price tag on a college education continues to climb without any end in sight, parents around the country are being forced to ask whether it’s worth trying to cover this outrageous expense on their children’s behalf. A key part of this issue is the question of what benefits might be had – either for parents or their children – when doing so.
First, the obvious: less student debt. In total, student loans are the second largest form of debt in the country, after mortgages, which puts them above credit card debt, car loans, and other forms of borrowing that traditionally cause problems for families. In contrast with mortgages or auto loans, however, student debt is uniquely challenging because it impacts young adults at the earliest point in their career, when they’re most vulnerable financially. Because of their relatively low level of income, new graduates often struggle to make their payments or set money aside for the future, leading to long-term repercussions for those with student debt.
In addition to their limited income, new college grads are seen as risky borrowers, since they have little or no credit or employment history, which means higher interest rates on the loans they receive. Over the life of a loan, this could mean tens of thousands of dollars in interest alone, something that can be avoided – or at least mitigated – with help from parents.
Of course, the huge cost of college makes paying tuition outright a difficult (if not impossible) task for many families, so it may not be feasible to pay for your child’s college all at once. That said, opening a 529 plan can provide a way to earn significant returns as your child grows, returns that are free from federal income tax if spent on education. If you have a young child and doubt whether you could or should pay for their college by yourself, consider maximizing your contributions with a 529 plan.
There are two main types of 529 plans that are generally available – prepaid tuition plans and education savings plans – in addition to a third type of account, the ABLE account, that benefits Americans living with disabilities. All three varieties are examples of investment plans, which generate earnings at a particular rate from one year to the next. Some 529 plans perform well, with rates of return as high as 9%, while others return only a few percent of the principal each year. These also differ in other respects, such as the amount you’ll pay in fees, the number of investment options available, and the possibility of a tax deduction or credit.
But picking the right kind of 529 plan can go a long way toward helping parents pay for their child’s college education. As the cost of tuition skyrockets, experts predict that even a public college education could cost more than $100,000 in 15 or 20 years, which makes prepaid tuition plans an attractive option. Parents who sign up for one of these accounts can effectively lock in today’s price of tuition for their child, potentially saving tens of thousands of dollars.
Education savings accounts are often more popular, however, because they come with greater flexibility. Whereas prepaid tuition plans are of relatively limited use outside of a particular state and only cover the cost of tuition and certain fees, 529 education savings plans can go toward books, equipment, housing, and other essential expenses as well. They also offer greater customization; account owners with some plans can pick from a dozen or more investment portfolios and could potentially earn more than someone with a state-managed prepaid tuition plan.
Any of these options can help to chip away at the cost of college, but they offer an added benefit as well: teaching the power of investments to your children. Although they’re a form of government aid, 529 plans essentially entail parents using particular investments to pay for their child’s college education themselves or with some assistance from financial aid programs. This kind of independence can set a valuable example for children from all walks of life while limiting debt and meeting a critical requirement for kicking off a fulfilling career.
As a parent, paying for college may seem less and less tenable as time goes on, but know that you don’t need to shoulder the expense alone. With a 529 plan, friends and family can easily contribute to your child’s future and help build up the kinds of funds they’ll need to cover the cost of higher education. Learn more about 529 plans or open a plan for your loved one by visiting Sootchy online or downloading the free Sootchy app today.