All it takes is some forethought and sound financial planning.
Avoiding a worst-case situation It’s not an easy world out there. Millions of young adults have graduated into a dicey job market, and what’s worse, they’re saddled with student loan debt. Many feel like they're stuck on a treadmill just trying gain a financial foothold.
The cost of college also has an impact on older generations. The parents or grandparents who co-sign these student loans may unwittingly assume the bulk of the payment responsibility.
Here are the facts:
- The U.S. Consumer Financial Protection Bureau estimated that outstanding federal student debt totaled nearly $1.2 trillion as of the summer of 2013.
- Of that outstanding debt, one out of five recipients had loans that were in deferment or forbearance. 8 percent of Direct loan recipients and 19 percent of FFEL recipients were in default.
- About 90 percent of those private loans were co-signed, most often by a parent or grandparent.
What's a parent to do? To balance their own retirement goals against the rising costs of college, parents have several financial planning options. You may not be able to avoid student loans completely, but these ideas may help you with paying them or reducing the amount of loans you may have to take. For instance, those who put down more upfront are likely to be less reliant on federal and private entities that fund higher education.
- Tax Advantaged 529 College Savings Plans* are investments created for a beneficiary to pay school-related expenses. Earnings in the account are income-tax free1 as long as the withdrawals are used for college expenses. Also, the person putting the money in the account retains control over it even when the recipient reaches the age of majority, so your child wouldn’t be able to use it, for instance, to buy a sports car without your permission and without having to pay taxes on the money.
- Buying a permanent life insurance policy is another option for parents. Permanent life insurance can be an option for parents looking to get out in front of payments for higher education. Permanent life insurance policies build cash value that policy owners may be able to withdraw or borrow from. 2
- Purchasing a juvenile permanent life insurance policy for children when they’re young can also help build savings for school. Purchase it now and the cash value will grow and may be accessed for education expenses. There's no need to commit to where those savings go, but many policyholders purchase these policies with the intention of supplementing a college fund.
- Families who encourage their children to work before or during college to earn money to pay for school may end up with less to pay and be able to manage debt more easily.