Total student debt in America is more than $1.3 trillion. This massive debt load threatens the ability of recent and future graduates to reach their goals of home ownership and economic independence.
How can you successfully get your children through college without subjecting them to suffocating debt obligations? You may not be able to escape completely debt-free, but here are five ways to lighten the load of student debt as much as possible.
1. Start Saving Early – You can't beat the preemptive approach. Use the power of compound interest and start saving as early as possible for your child's education. Don't wait until the junior high or high school years — establish your fund before he or she starts grade school. Put away whatever you can afford every week/month, because even a small amount makes a big difference over ten to fifteen years.
Look into specific programs such as 529 savings programs that have tax advantages and are designed specifically for higher education purposes. States offer 529 plans, but you can choose to invest in any state's plan whether or not you live there or your child's college destination is located there.
2. Evaluate/Liquidate Assets – If you didn’t start saving early, do not panic yet. Before looking at alternate forms of debt to student loans — in other words, assuming much of the debt yourself — look at other assets that can defray the cost.
If you have invested in a 529 savings program or similar plan, great — you have pre-planned assets to liquidate. Otherwise, evaluate any asset such as a real estate holding or cars, and do a quick cost-benefit analysis. How is the value likely to change in the future, and will it cover enough of the cost to make it worth liquidating? Only you can decide whether it's best for you to liquidate or seek other paths.
3. Minimize Loans – If you have to use loans, seek relatively low loan amounts through the government's financial aid programs. Submit the Free Application for Federal Student Aid (FAFSA) to find out what you qualify for. Even if you decide not to pursue a loan, the FAFSA is a good first step to evaluate your overall situation.
4. Consider a HELOC – If your home has provided you with a sufficient build-up of equity, consider a home equity line of credit (HELOC). It can provide you with immediate cash, is tax-deductible, and usually carries a relatively low interest rate. Compare rates with the federal student loans available to you, as well as the cap amount on student loans to see which works best for you.
5. Refinance Your Mortgage – Refinancing will not work to your advantage in all situations, but given today's low interest rates, it may make sense to rework your mortgage and free up enough cash to cover college expenses by removing the majority of your equity. Again, this assumes you have sufficient equity in your existing mortgage.
You really do not want to have to limit your child's college choices to what you can afford, but sometimes this is the only realistic approach. Take some time to find out what is important to your child, and what his or her field of interest is. Investigate the nearby universities that charge in-state tuition (some schools offer deals to residents of neighboring states as well) and compare their academic programs and costs to find the best deal.
Don't forget about the possibility of scholarships and grants at each school under consideration. It is hard to beat free money. Your child can also consider work-study programs, or if he or she can handle the workload, a part-time job to defray some expenses.
If you are having trouble coming up with a plan, consider working with a college fund advisor. They focus on college funding applications, as opposed to a general financial planner.
Aside from saving early, these may not be the most pleasant options, but they are preferable to saddling your child with mountains of student loan debt. That burden can ruin your child's life when a more realistic payment option and/or choice of school can get him or her an education — and a decent post-graduation job as well.