College is expensive, and many students will need to borrow to cover at least part of the cost. But Kathryn Flynn, content director for Savingforcollege.com, recommends not waiting until after graduation to start paying off those loans.
"While students are not typically responsible for paying federal unsubsidized Stafford loans until the six-month grace period after they finish school, it's a good idea to start earlier," she says.
Interest on this type of loan begins to accrue from the time it is first disbursed, Kathryn adds. If no payments are made during this time, the interest will capitalize - this means it will be added on to the principal and interest will begin to accrue on this new, larger balance. By making interest-only payments during college, students will end up paying less in interest over time.
Students can better prepare themselves for paying for college by having a discussion with their parents on exactly how they will pay for college, and if loans are part of the conversation, they should understand the effects of delaying payments. In addition, savvy students will also choose a school and major based on potential future income and their ability to pay back their loans.
We recently checked in with Kathryn to get more advice about paying for college as the cost of higher education continues to rise. Here's what she had to say:
Tell us about Savingforcollege.com. When and why did you start your site?
Joseph Hurley, CPA, founded Savingforcollege.com in 2000. His interest in college savings plans began with the signing of the Taxpayer Relief Act of 1997, which made major revisions to the rules surrounding Internal Revenue Code Section 529. This led to the federal introduction of the tax-advantaged 529 college savings plans we know today. In January 1999, Hurley wrote and published the bestselling book The Best Way to Save for College - A Complete Guide to 529 Plans, which has sold over 100,000 copies.
Today, Savingforcollege.com is a leading source of unbiased information on college savings plans. Each week tens of thousands of families and financial professionals visit the site, looking for information on 529 plans, financial aid, scholarships and other ways to save and pay for college.
Why are you so passionate about helping people figure out how to pay for higher education?
At Savingforcollege.com, we believe that a college degree, although it can be pricey, is 100 percent worth the investment. We also understand the crippling effects that excessive student loan debt can have on young adults. We are seeing more and more Millennials being held back from things like home ownership because of their student loan repayment obligations. New parents need to realize that college costs are nearly three times as high as they were during the late '90s when they were students, so the potential burden of debt is much greater.
What's the one piece of advice you find yourself repeating over and over about saving for a college education?
Save early and often, and use a 529 plan. With a 529 college savings plan, you get the advantage of tax-free earnings growth combined with compound interest. You won't be taxed on withdrawals, either, as long as the money is spent on qualified education expenses. This includes the costs of tuition, fees, books, special needs equipment and some room and board. Assets held in 529 plans have a minimal effect on financial aid compared to other student-owned accounts, such as UGMA/UTMA accounts. Plus, your withdrawals won't count as income on the next year's FAFSA. Your home state's plan may also offer state tax credits or deductions on contributions to a 529 plan.
Most importantly, your 529 plan will earn interest, which is always better than borrowing and paying interest. Let's say you plan on sending your newborn daughter to your alma mater, which costs around $25,000 a year today. Your family is living on a tight budget and you can't find room to save for college, so you decide to wait and take out student loans when it's time to pay tuition. Based on the college inflation rate of 4 percent, in 18 years her total cost of four years of college will be about $215,000. If we assume a loan interest rate of 8 percent and a 10-year repayment plan, your daughter's loan would cost her just over $2,600 a month. Over time, her total loan repayments would be over $313,000.
Now let's say your neighbor, who has a son the same age who is going to the same school, chooses to save the entire $215,000. By making monthly deposits of $465 to a 529 college savings account over the next 18 years, his total contribution comes to $117,000 (assuming an annual investment return of 6 percent).
Over the long run, you'll end up paying almost $200,000 more than your neighbor for the same degree! Even if you can't fund your child's entire college education with a 529 plan, any amount you save will reduce future loan obligations. Many plans offer automatic payment plans with minimum deposits as low as $25 a month. You can also consider asking friends and family for 529 contributions in lieu of birthday or holiday gifts to help fund the account.
What advice do you have for parents on teaching their kids about budgeting before they head off for college? What's the best way to teach teens how to budget?
Involve them early in the saving process. When they have a part-time job, make them save a portion by putting it into college fund. Don't give students a large sum up front. Develop an allowance budget. Let teens be accountable for finances before they go off to college to develop responsibility. Making interest payments on student loans can also help build responsibility.
When creating a college budget, what do parents and students need to consider?
Food; housing; expenses like fraternities, sororities, etc.; books; sports equipment; computer; other supplies for dorm; gas to travel to and from school; laundry; student loan payments.
What are the most common financial considerations you think families overlook when it comes to paying for college?
Scholarships, no matter what size, can be a great way to supplement savings. Families often overlook the true potential of scholarship money. Many feel that it's not worth it to apply unless the reward is a significant dollar amount, but the reality is that even small scholarships can add up over time. Plus, any amount of scholarship you receive will reduce the amount you have to borrow. So a $1,000 reward is actually more than that because if you end up having to borrow that same amount, you'll also have to pay interest on it. Students should also remember to continuously look for and apply for scholarships each year they have to pay for college.
What do you think are the biggest mistakes students make with their money?
The biggest mistake is going off to college without having a budget in place that includes student loan interest payments. The second biggest mistake, of course, is being enticed by credit cards and running up non-academic debt.
Where can students/families find savings on...
...Books? Look for used textbooks or international editions. If they feature the same content as the new books, there's really no reason to pay more.
...Housing? Living at home with your parents is usually the most cost-effective, especially if you spend that time attending community college or taking online courses where you can transfer your credits toward earning a four-year degree. If that's not an option, you can look for a reasonably priced apartment off-campus and find a few good roommates to split costs. Books and some housing costs are also considered qualified education expenses, so you will benefit from tax savings if you use your 529 savings to pay for them.
...Food? Stick to a grocery budget and cook at home whenever possible. The key is to have snacks and food on hand so you can avoid running out for fast food and late-night munchies. Coffee shops can be another budget-buster. Instead of Starbucks, try bringing a cup of home-brewed coffee to the library to study.
...Entertainment? If you like going to the movies, try to stick to matinee showings. You might also find a number of free movies on campus, including classic, independent and student films.
What headlines or trends related to paying for college do you think parents and students should be following today? What impact will these stories have on students?
During his most recent State of the Union address, President Obama suggested taking away the federal tax benefits of 529 plans, claiming that only a few wealthy families use them. Just one week later, he retracted the proposal after a wave of media frenzy and public outcry. The result was a spiked interest in college savings and the introduction of a new bill into Congress that would expand 529 benefits.
That bill, H.R. 529, is expected to be brought to the House floor next week. If approved, the bill will make key improvements to 529 plans, including making computers a permanent qualified expense and allowing 529 users to redeposit funds into their account if they receive a refund from the school after dropping out or withdrawing from courses.