Are You Worried About College Debt? Start Here
Attending college is a major financial burden facing millions of families each year in the United States. The cost of obtaining a degree rises on an annual basis at a pace that regularly exceeds all broad inflation rates, and is fueled by lenders passing out student loans like candy. Although most parents believe there is value to be found in a college education, many worry about the long-term effects of graduating with debt.
The days of a college degree virtually guaranteeing material wealth are over. Ninety-six percent of parents see value in a college degree, but 85 percent are very or somewhat worried that student loan debt will hinder their child’s ability to purchase a home, car, or other large purchases after graduating, according to a new survey from Discover Student Loans. Only 3 percent say they are not at all worried about the side effects of debt. A little more than half of parents say they their child plans to use loans to pay for college.
“It is promising to see families recognize the investment in a college education and are considering their children’s long-term financial health beyond graduation,” said Danny Ray, president of Discover Student Loans, in a press release. “We hope that this annual survey brings to light the need for families to review all of their options when going to college. We encourage students to always use free money first when financing a college education and then, if needed, determine what lending options work best for their needs.”
Despite the concerns, 48 percent of parents claim cost will not be a factor when their child selects a college, up from 40 percent last year. On the other hand, 44 percent of parents are limiting their child’s college choice based on price, while 8 percent are unsure. Furthermore, three out of four families say they are very or somewhat worried about having enough money to cover college costs.
Communication among parents and students is a crucial first step in the college process. “As students prepare to enter college this fall, it’s important for parents to have clear and honest discussions with their children about how they’ll pay for college,” said Ray. “Students need to understand the financial responsibilities they take on and, more importantly, who is responsible for repayment of loans upon graduation.”
The number of parents who say their child should pay for most or all of their college education has increased for the past three years. In 2014, 15 percent of parents said they believe their children should pay for the entire cost of college, up from 13 percent in 2013 and 12 percent in 2012. In fact, 32 percent of parents think their child should pay for most of their schooling, compared to 27 percent in 2012.
In order to help offset college costs and debt burdens, parents looking to offer financial help to their children should consider 529 savings plans as soon as possible, which are tax-advantaged investment plans to encourage saving for future higher education expenses. They are sponsored by states, state agencies, or educational institutions, and are authorized by Section 529 of the Internal Revenue Code. All 50 states and the District of Columbia sponsor at least one type of a 529 plan.
A 529 plan is relatively simple. The account holder establishes an account for the student (the beneficiary) and selects how contributions will be invested over time. In general, there are degrees of risk tolerances to choose from, and investment options often include stock mutual funds, bond mutual funds, money market funds, and age-based portfolios that become more conservative as the beneficiary nears college age. Account holders may change investment options once a year, and many plans have contribution limits in excess of $200,000. There are no income limits for account holders.
Americans do not have to select the 529 plan offered by the state they reside in, but there might be additional tax benefits if they do, as the majority of states offer a tax deduction on contributions. All 529 savings plans grow tax free from federal and state income taxes, and withdrawals are not taxed as long as the funds are used on qualified expenses, including tuition, room and board, mandatory fees, books, and computers. However, non-qualified expenses are subject to income taxes and a 10 percent penalty on the earnings.
More From Wall St. Cheat Sheet:
- Is Saving Money Your Biggest Financial Battle?
- Why Delaying Retirement Might Be Your Best Strategy
- Most Americans Are Not Ready for This Financial Disaster
Follow Eric on Twitter @Mr_Eric_WSCS