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How to Save for College and Pay Off Student Loans?

How much student loan debt does the average college graduate accumulate upon crossing the stage for their diploma in the United States?

$5,000?

$10,000?

Not even close.

The average college graduate in the US carries an astonishing $39,487 in student loan debt.

And that’s just the average.

When you multiply this amount by the millions of students, the total student loan debt in the US amounts to a staggering $1.58 trillion.

College graduates might be lucky if they manage to pay off their student loans before their children embark on their college journeys.

As a parent, you’re likely thinking there must be a better way to secure your child’s educational future.

You can proactively start saving for college by establishing a college fund.

It may not be easy, but with dedication, hard work, and meticulous planning, it’s entirely possible.

You can save enough to ensure your child can navigate their college years without the burden of debt.

Please note that the information provided in this article is useful for people who wish to save for their child’s education.

I’ve also included the information for people who wish to pay off their college loans faster.

Most of the information is targeted towards people from the U.S., but it is useful for others as well.

All the data is provided for educational purposes and it should be treated that way.

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

How to Save for College: Things to Consider

Determining How Much to Save for College

The first step in embarking on the journey of saving for your child’s college education is determining how much you need to save.

The amount you need to save can vary depending on several factors, including:

  • Your child’s current grade level
  • Your expected savings timeline
  • The type of college or university they plan to attend

Choosing between public and private schools, for example, has a profound impact on the total cost of college.

Here’s a breakdown of average school costs for the 2022–2023 academic year in the US:

Public, Two-Year College: $20,000

Public, Four-Year, In-State College: $30,000

Public, Four-Year, Out-of-State College: $45,000

Private, Four-Year College: $60,000

It’s important to note that these figures do not account for inflation, and tuition costs are expected to increase over the next 18 years.

When Should You Start Saving for College?

How to Save for College
Photo: Canva

The answer is simple: as soon as possible.

While saving for your child’s college education is indeed a noble goal, it’s not the sole financial responsibility of parents.

Many believe that parents are obligated to pay for their child’s college education, but in reality, this may not always be feasible.

The truth is that your child can actively contribute to their college expenses through scholarships, grants, part-time employment, or work-study programs.

Before you dive headfirst into saving for college, you should ensure that your financial future is on solid footing.

This isn’t selfish; it’s smart. Here are the financial milestones you should strive to achieve:

  • Save $1,000 for your starter emergency fund.
  • Pay off all your debt (excluding your mortgage) using the debt snowball method.
  • Establish a fully funded emergency fund equivalent to three to six months’ worth of your living expenses.
  • Invest 15% of your household income in retirement accounts (such as employer-sponsored 401(k) or a Roth IRA).
  • Consider enrolling in a Financial Peace University class to gain knowledge on debt management and savings.

How to Start a College Fund and the Types of College Funds

Once you’ve ticked off these essential financial steps in your own life, and you have a clearer understanding of the projected costs associated with your child’s chosen school, you can embark on saving for college by using tax-advantaged plans.

Establishing a college fund is a relatively straightforward process, but selecting the appropriate fund is crucial.

Let’s explore the various options available in the US.

Education Savings Account (ESA) or Education IRA

An ESA functions similarly to a Roth IRA but is earmarked for educational expenses.

It allows you to invest up to $2,000 per year, per child on an after-tax basis.

The beauty of an ESA lies in its tax-free growth.

Assuming you contribute $2,000 annually from the time your child is born, you’d have invested $36,000 by the time they turn 18.

While the rate of growth varies depending on your chosen investments, if you achieve an average return of 10–12%, the total could reach around $112,000 by the time your child enters college.

The ESA can be used for various expenses, including private school tuition, vocational school costs, textbooks, school supplies, or tutoring.

If your child doesn’t require the funds, you can transfer them to a sibling for their educational expenses.

Pros and cons of Education Savings Account (ESA) or Education IRA

Benefits of Education Savings Account
  • Diverse investment options.
  • Tax-free growth.
  • Potential for a higher return on investment compared to regular savings accounts.
Cons of Education Savings Account
  • Annual contributions are limited to $2,000 per child.
  • There are income limits for eligibility.
  • Funds must be used by the beneficiary before the age of 30.

529 Plan

If you intend to save more than $2,000 annually for your child’s college education, or you don’t meet the income requirements for an ESA, a 529 plan is a viable alternative.

However, be cautious as not all 529 plans are created equal.

Look for a flexible plan that permits you to choose the funds in which you invest.

Avoid prepaid 529 plans that fix your tuition savings rate or automatically adjust your investments based on your child’s age.

You’ll want to maintain control over your investment choices throughout the entire process.

Much like ESAs, 529 plans can be used for a range of educational expenses, including tuition, school fees, and college textbooks.

Some 529 plans offer the option to transfer funds between family members, which is beneficial if the child for whom you’ve saved decides not to attend college.

However, this feature may not be available in all 529 plans.

Pros and cons of 529 plans

Benefits of 529 plan
  • Higher annual contribution limits (varies by state, but generally up to $300,000).
  • Typically no income restrictions or age-based limitations.
  • Tax-free growth.
Risks of 529 plan
  • Restrictions may apply when transferring funds to another child.
  • If a single person contributes more than $17,000 to the 529 plan in 2023, that amount may be subject to a gift tax.

Related content: Opening 529 Account for Non-U.S. Citizens and Its Top Alternatives

UTMA or UGMA (Uniform Transfer to Minors Act or Uniform Gift to Minors Act)

Only consider a UTMA or UGMA if you’ve already explored ESAs and 529 plans or if you don’t meet the requirements for an ESA.

These plans differ from ESAs and 529 Plans because they are not solely designed for saving for college.

The account is held in the child’s name but managed by a parent or guardian until the child reaches either age 18 or 21, depending on state laws.

Once the child reaches the designated age, they gain control over the account and can use the money as they see fit.

In essence, you’re opening a mutual fund in your child’s name.

While you can utilize a UTMA or UGMA to save for college and invest in your child’s future, your child ultimately decides how the money is spent.

These plans don’t impose limits on the amount of gift money you can contribute.

However, contributions exceeding $17,000 per year (or $34,000 for a married couple) may be subject to federal gift tax.

Pros and cons of Uniform Transfer to Minors Act

Benefits of UTMA
  • Funds can be utilized for more than just college expenses.
  • Offers tax advantages for the contributor.
Risks of UTMA
  • The beneficiary gains full control of the money once they reach legal age, which means they can use the funds as they choose.
  • The designated beneficiary cannot be changed once selected.

These options provide flexibility when it comes to saving for your child’s educational future.

Choose the one that best aligns with your financial goals and constraints.

Setting Realistic Goals and Monitoring Progress

Saving for your child’s education is a long-term endeavor, and setting realistic goals is vital to achieving success.

Many parents aspire for their children to pursue a college education.

However, it’s essential to recognize that college is a privilege, not an obligatory path for every child.

Moreover, it’s worth noting that it may not be necessary for every child to attend college.

If your child decides to pursue higher education, it’s important to understand that you’re not solely responsible for covering all the costs.

Encouraging your child to take ownership of their education is not only acceptable but also empowering.

Even as a full-time student, your child can take steps to start building their savings and fostering responsible financial habits that will serve them well in the future.

Tips for Saving for College

Pursue Scholarships

Tips for Saving for College
Photo: Canva

Scholarships provide your child with free money for college that doesn’t require repayment.

Encourage them to leverage their skills and excel in areas such as academics, athletics, or extracurricular activities to access these valuable funds.

Applying for every scholarship they are eligible for, including the smaller ones, can significantly contribute to their college savings.

Explore Financial Aid

Every student with a desire to attend college should complete the Free Application for Federal Student Aid (FAFSA).

This application is used by colleges and universities to determine the financial aid package available to the student.

FAFSA encompasses various forms of free money, including federal grants, work-study programs, state aid, and institutional aid.

Be vigilant, however, as it may also indicate the amount your child can borrow in student loans, which should be avoided.

Make sure to scrutinize the award letter to ensure it primarily consists of scholarships and grants.

Consider Advanced Placement (AP) Classes

AP classes offer high school students the opportunity to earn college credits while still in high school.

Each AP class taken during high school means one less course to pay for in college.

This approach can lead to substantial savings, so encourage your child to consult their academic counselor for more information.

Encourage Employment

Whether during the summer or part-time during the school year, a job provides your child with the opportunity to save money for college while gaining valuable work experience to enhance their resumé.

Open a Savings Account

To manage their college savings, your child will require a secure place to deposit their funds.

Many banks offer student-specific savings accounts that typically feature waived monthly maintenance fees and no minimum balance requirements.

If your child is under 18, you may need to act as a joint account holder.

Related content: Individual Savings Accounts: What Happens to Them if You Move Abroad?

Promote Saving Over Spending

When your child receives birthday money or an allowance, suggest that they prioritize placing it into their savings account rather than succumbing to the temptation to spend it.

Avoid Student Loans

Student loans should not be considered an option, even as a last resort.

While they may appear as a quick solution, they often lead to graduates burdened with crippling debt.

If your child is unable to pay for tuition upfront, it may be advisable to postpone college temporarily to work and accumulate more savings.

Opt for Affordable Schools

Although Ivy League institutions may be alluring, attending an in-state college can provide similar degree programs at a lower cost.

Staying local also reduces expenses related to moving, out-of-state tuition, and travel, resulting in substantial savings.

Consider Living at Home

Having your child live at home and commute to college can lead to substantial annual savings on room and board expenses.

Additionally, your child can forgo expensive campus meal plans by preparing meals at home or participating in family dinners, making it a financially sound choice.

Explore Employer Tuition Reimbursement

Some companies offer tuition reimbursement to their employees who are college students.

If your child is seeking part-time employment, assist them in identifying companies that provide tuition reimbursement benefits as part of their job perks.

Every bit of financial support counts, and your child will also gain professional experience to enhance their resumé.

How to Pay Off Your Student Loans Quick?

How to Pay Off Your Student Loans Quick
Photo: Canva

Increase Payments Towards the Principal Balance

There is no penalty for repaying student loans early or exceeding the minimum payment amount.

However, when making extra payments, be aware that student loan servicers might advance your due date by applying the additional payment to the next month’s payment.

Advancing the due date won’t expedite the process of paying off your student loans faster.

Typically, the extra payment first covers any late fees and accrued interest before reducing the principal balance.

To ensure your extra payments go directly towards reducing the principal balance, contact your servicer through their online platform, by phone, or by mail.

Request that overpayments be applied to the principal balance while keeping the next month’s due date unchanged.

You can make additional payments at any time during the month or opt for a lump-sum payment on the due date.

Implementing either strategy can lead to substantial savings.

Consider Refinancing with Good Credit and Stable Income

Refinancing your student loans provides a way to pay them off more quickly without making extra payments.

The process of refinancing involves replacing multiple student loans with a single private loan, ideally at a lower interest rate.

To expedite repayment, choose a new loan term that is shorter than the remaining term on your current loans.

Opting for a shorter term may lead to higher monthly payments, but it accelerates debt repayment and reduces interest expenses.

Refinancing is excellent if you have a credit score in the high 600s or above, a steady income, and a debt-to-income ratio below 50%.

Avoid refinancing federal student loans if you plan to utilize programs such as income-driven repayment and Public Service Loan Forgiveness.

Enroll in Automatic Payments

Signing up for automatic payments can reduce the interest rate on your student loan.

This allows a larger portion of your payments to go toward the principal balance.

Federal student loan servicers often offer an interest rate discount if you authorize them to automatically deduct payments from your bank.

Many private lenders also provide an auto-pay deduction.

While the savings from this discount may be relatively small, such as lowering the interest rate on a $10,000 loan from 4.5% to 4.25%.

It can complement other strategies to accelerate student loan repayment.

To take advantage of this discount, contact your servicer to enroll in automatic payments or inquire about the availability of an autopay discount.

Adopt a Biweekly Payment Schedule

Making biweekly payments involves paying half of your monthly student loan bill every two weeks instead of making one full monthly payment.

This schedule results in making an extra payment each year, reducing the repayment timeline and interest costs.

You can use a biweekly student loan payment calculator to determine the time and money savings.

Pay Off Accrued Interest

Unless your loans are subsidized by the federal government, interest accumulates while you are in school, during your grace period, and periods of deferment and forbearance.

This accrued interest capitalizes when repayment commences, leading to an increased balance and higher interest payments.

Consider making monthly interest payments while it accumulates to avoid capitalization.

Alternatively, you can make a lump-sum interest payment before the grace period or postponement period ends.

Although this won’t directly accelerate the payoff process, it results in a smaller balance to eliminate.

Stick to the Standard Repayment Plan

By default, federal student loans are placed on a 10-year repayment schedule, unless you choose an alternative plan.

If you cannot make extra payments, adhering to the standard repayment plan is the quickest way to pay off federal loans.

Federal loans offer income-driven repayment plans, which can reduce your monthly payments but extend the repayment duration.

Loan consolidation is also an option, which can extend repayment to a maximum of 30 years, depending on the loan balance.

Opting to stay on the standard repayment plan, if feasible, will lead to a faster path to becoming debt-free.

Utilize Windfall Funds and ‘Found’ Money

If you receive a raise, a bonus from student loan refinancing, or another financial windfall, allocate a portion of it to your student loans.

Some employers offer student loan repayment programs as an employee benefit.

Check if your company provides this option and inquire about enrollment.

Consider starting a side hustle to boost your income and expedite student loan repayment.

Explore options like selling clothing, unused gift cards, or freelance services.

Bottom Line

When it comes to preparing for your child’s college education, there’s no such thing as starting too early.

Whether your child is in their teenage years or still a toddler, the ideal time to kickstart a college fund is now.

Of course, this should follow the completion of crucial financial steps, including debt repayment, establishing an emergency fund, and initiating contributions to retirement accounts, targeting 15% of your income.

Crafting a well-thought-out plan for your child’s future begins with a comprehensive understanding of the available investment avenues.

You can gain insights from seasoned investment professionals, and the good news is that you can connect with them for free.

These are experts we have full confidence in, and they are here to guide you in securing your child’s college investment.

You can grab a copy today or even begin your reading journey for free, accessing a wealth of tips on how to navigate the path to a debt-free college experience.

The significance of saving for your child’s college education cannot be overstated.

Starting early and making informed investment decisions will not only alleviate the financial strain but will also empower your child to embark on their college journey with confidence and security.

It’s a proactive step that lays the foundation for a brighter, debt-free future.

I hope that the information provided in this article was helpful in knowing how to save for your child’s education.

That being said, if you want an expert financial advisor or wealth manager to tend to your needs, I can be of assistance.

If you are an expat or a high-net-worth individual (not from the U.S.), feel free to reach out to determine whether you can benefit from my services.

Pained by financial indecision? Want to invest with Adam?

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How to Save for College and Pay Off Student Loans? 5

Adam is an internationally recognised author on financial matters, with over 735.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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