Minimize Borrowing Costs for College

The average annual cost of higher education has increased dramatically in the last decade. Most Americans have to take out some kind of student loans, whether federal or private, to cover the costs. For the first time, student loan debt has reached more than $1 trillion.

With that in mind, you’ll want to spend some time thinking about how you’ll contribute to your children’s (or grandchildren’s) higher education. Whether they’re going to college this fall or just starting kindergarten, it’s never too early to start planning.

Here are some tips for avoiding debt overload while paying for college, graduate school or other education:

Start saving early. This will help reduce the amount you may need to borrow. 529 college investment plans are a helpful tool for building a savings fund. These qualified tuition plans allow you to save money for a child’s college or graduate school education in an individual investment account. One type gives you the ability to lock in future tuition at today’s prices. The other allows you to place funds in an investment or deposit account and receive tax benefits.

Choose schools wisely. You’ll want to think long and hard about whether a more prestigious school will be worth more debt. Conduct your own cost-benefit analysis before registering for the best Ivy League that accepted your child. Factors to consider include starting salary for the field he or she plans to enter and how much assistance in scholarships, grants and financial aid the school is willing to offer.

Find ways to cut costs. You can get a good look at the total cost of a particular school by adding up the following: tuition and fees, books and supplies, room and board, transportation, parking, personal expenses such as laundry and cell phone service and any extra program expenses, like studying abroad. Then you can find ways to cut costs in each category. High school students who take advanced courses or pass special college-level exams can earn college credits before they arrive on campus. Other ways to save include commuting from home or choosing a less-expensive meal plan.

Apply for scholarships and grants. Explore all of the “free money” opportunities that don’t have to be repaid before you consider taking out loans. Colleges often award grants based on academic merit, artistic or athletic talent, financial need or other factors.

Understand the options if you must take out a loan. Federal student loans usually have lower interest rates and more flexible repayment options than private loans from non-government lenders. Under current law, all federal student loans are obtained through the Federal Direct Loan Program administered by the U.S. Department of Education. The first step toward applying for financial aid and a federal loan is to visit www.fafsa.gov. If you are considering a private student loan, it’s important to know with whom you’re doing business and the terms of the loan.

Paying for higher education is a serious long-term financial obligation, which is why comparing the costs of different ways of financing it is so important. You want your child to get a great education, but you also want them to get a start in the real world without worrying about burdensome debt.

Doug Welch can be reached at 865-766-3024 or doug.welch@pnfp.com.