The Changing Ways Parents Are Funding Their Kids’ Post Secondary Education
Getting the money together to go to college, university, or a vocational training program ain’t like it used to be. Thanks to skyrocketing tuition costs and a steady increase in the cost of living, savvy parents are having to think further outside the box when it comes to funding the cost of post secondary education for their children. But how exactly has the economic landscape changed over the past generation, and what should parents do to secure funding without taking major long-term financial risks?
Fortunately, we’ve spent years helping parents prepare their children for adulthood—and we already know a thing or two about handling the costs of college or uni. Stick with us as we go over key info about post secondary funding and suggest strategies that can help.
How College & University Used to Be Funded
In the ‘90s and 2000s, helping your child pay for post secondary education was a lot more straightforward. You held grassroots fundraising events with other parents, took out a line of credit in your child’s name (if they were the type that could be trusted with that responsibility), and encouraged them to apply for every scholarship they could get their hands on.
How the Economic Landscape Has Shifted for Current & Prospective Students
Today, things are a bit different. For one thing, tuition costs for a 4-year diploma program in the United States have jumped nearly 137% since the turn of the new millennium. And for private schools, the numbers are even more startling. On average, a 4-year program at a public college cost $3,501 in the year 2000. Today, that’s jumped up to $9,349. But the same program at a private school would have cost $15,470 in 2000—and it costs $32,769 today.
That’s a lot of bake sales, bottle drives, and essay contests. So what else can conscientious parents do to help their kids afford school?
Three Strategies for Funding Your Child’s Post-Secondary Education
We’re not saying you shouldn’t host community fundraisers or encourage your kids to apply for scholarships. You can still raise a lot of money that way, and it’s money they won’t have to pay back—which will feel great once their degree is finished and they’re (hopefully) starting their careers.
But the sad fact is, most scholarships just haven’t kept up with tuition increases—which means that for most parents, funding your kid’s education is no longer a question of if you borrow money, but how. Here are three ways to plan for the costs of post secondary education for your child:
Education-Centric Investments: Tax-Advantaged Accounts & Trust Funds
The earlier you start saving for your child’s college fund, the less you’ll have to borrow when the time comes to pay for their first semester. Traditionally, education-centric investments take one of two forms: tax-advantaged accounts or trust funds.
Tax-advantaged accounts like a 529 Plan are tax-deferred while you’re making contributions to them—and any money you withdraw for qualified educational expenses is tax-free. They can be used to cover educational expenses from kindergarten all the way up to grad school, making them a versatile investment option.
Some 529 plans are also offered by specific states and institutions in the form of prepaid tuition plans, which allow the account holder to lock in tuition rates for a student who may be attending post-secondary education years down the road. When used correctly, these plans can save families thousands.
Trust funds are different—they’re created by a grantor for the purposes of transferring assets to a trustee (in this case, the child who will be attending a post secondary institution). The grantor does not retain any rights over the trust—the trustee assumes total responsibility for the assets being held in the fund (although revocable trust funds do exist, in which some degree of ownership can be retained by the grantor).
Trust funds are often taxed according to the income of the trustee instead of the grantor. Since students typically earn much less than their parents, this can be an excellent way to save money for the family at tax time—as long as the money is managed responsibly.
Lines of Credit Against Assets
Not all parents are able to set up savings accounts or trust funds when their children are born—which means they need to rely more on borrowed money to send their kids to college or university. That’s where lines of credit can come in handy.
Home Equity Lines of Credit (HELOCs) are easily the most popular example. The basic idea is similar to a mortgage, but for sending your child to school—you borrow against your home and use the money to cover expenses like tuition and textbooks.
When HELOCs have lower interest rates than student loans, they can be a great way to save money and reduce long-term educational debt for your children. But remember: while student loans are unsecured, HELOCs aren’t. You’re putting your home on the line, and you could conceivably lose it if you find yourself unable to make payments.
Parent loans are an interesting option that provides flexibility. While they aren’t for everyone, they are a good solution for some and you may see value there. Compared to student loans, parent loans generally come with significantly lower interest rates.
The way a parent loan works is simple; it’s like a student loan, but you take it out instead of your kids. Unlike a student loan, though, you’ll need to undergo a credit check—and they don’t come with a grace period, so your payments will start immediately after the funds are disbursed to your child’s educational institution. Still, what you save on interest payments makes these loans more attractive than conventional student loans for many families.
Making the Smartest Choice for Your Circumstances
Ultimately, the way you put money aside for your child’s education is up to you—but we recommend different approaches for different families. If you can afford to start saving significant amounts into a trust fund or 529 plan before your child is even born, you may not have to borrow as much (or at all). However, if you’re like most families and need to borrow money for your children’s educational costs, a parent loan may offer less risk than a HELOC and more favorable terms than a traditional student loan.
Weigh the options above and make the choice that feels right for you—but don’t wait too long! The sooner you start making plans for your child, the better your options will be. Now, check out our other money-saving tips for families—on everything from back to school shopping to buying sports equipment.