Before I answer this question, I want you to look at the income of people with a college education vs people who don’t. Publicly available data and our observation show that people with a bachelor’s degree or a master’s degree get higher-paying jobs.
Below chart, I copied from the U.S. BUREAU OF LABOR STATISTICS. It shows the median earnings by education level in the United States from the 2021 population survey.
People with bachelor’s degrees earned 48% more than people who don’t complete their degrees. Clearly, completing the degree has a huge positive impact on median earnings. Also, people with professional degrees such as doctors, engineers, and lawyers earn even higher amounts.
Ways of funding college education
How to fund their child’s higher education is an important decision all parents will have to make at some point. Planning early for a college education is better than planning later and it is esp. true when you have more than one child.
In the US, there are several ways you can do that:
529 plan
You can create a college fund using a 529 plan. A 529 plan is a tax-advantaged college savings account offered by either your state government or college.
The tax advantage is the main benefit of it. Tax advantage means you invest your post-tax money, but it grows tax-free. Also, when you withdraw your money for college, you don’t have to pay taxes on it, as long as it is used for education purposes.
If you are aware of 401k plans, 529 plans are similar to those. However, this money you withdraw can only be used for education. There is a penalty of 10% for non-educational use and you will have to pay income tax on it.
To know more about this option, you can look at this website for all the details.
Loans
If you can’t afford to pay for your child’s college education from your own savings or investment, you can borrow.
I am going to get a little sidetracked here, but from what I learned from various finance books and legit websites is worth sharing. I feel borrowing for good investments pays off in long run.
Loans taken for higher education, starting or growing a well thought business, or real estate are all good investments. As there is a very high chance of you earning more from these investments. It is like you are investing for your future. So even if you have to pay interest on your loan, your earnings increase much more in comparison, to compensate for it.
However, borrowing to pay for things that will ultimately depreciate, such as cars, furniture, and vacation isn’t worth it.
Coming back to the topic, alternatively, you can also borrow for higher education if your savings or investment can’t cover the cost.
Take loans from either the Federal government or from private banks
These student loans can be used for tuition, accommodation, books, and other miscellaneous costs related to college. The interest rates on Federal loans are usually lower compared to private banks.
As of today, interest rate on federal unsubsidized loan is 4.99% for bachelor’s degree and 6.54% for professional and graduates degrees. The repayment period defaults to 10 years but can be extended up to 30 years. For more info, you can refer to the Federal student loan website.
On Aug. 24, 2022, the U.S. Department of Education (ED) extended COVID-19 emergency relief for student loans through Dec. 31, 2022. Please see here for more details.
https://studentaid.gov/help-center/answers/article/what-is-current-interest-rate-for-direct-unsubsidized-loans
How much can I borrow for a student loan?
For the undergraduate level, you can borrow each academic year between $5,500 and $12,500 depending on your year in school and dependency status. For graduate or professional level, you can borrow up to $20,500 per year.
Types of Federal loans
The main difference between Direct Subsidized Loans and Direct unsubsidized loans is the financial need element. Direct subsidized loan are available to undergraduate students with financial need, so the US government pays interest on your behalf.
Direct unsubsidized loans are not based on financial need and hence you pay the interest on the loan. On these loans, interest accrues (adds up) every day.
Borrow from private banks
The other option is to borrow from private banks. Usually, the rates are higher than Federal student loans.
With private loans, the payments get due while you are still in college. In the case of a Federal direct unsubsidized loan, payments are not due until after you graduate.
My two cents
Get higher education even if it requires borrowing. Also, you have to understand how much money you should borrow. The main aim is that it should cover your tuition and basic living expenses, if you are staying away from home.
It may be tempting for you to go to a great location, a beautiful campus, and choose a college with the best athletics. But, you should decide if taking a bigger loan for these extra amenities is even worth it, esp. when you have to pay interest on your loan.
Another option is to check with a nearby college. From my experience, degree from UCLA or USC counts equally well as a degree from UC Berkeley, if you are applying for jobs in and around LA. If your nearby college has a decent rating, living at home and attending local universities will save a lot money on accommodation.
Some kids also join two years of community college and then attend two years at their local public university This is a much cheaper option and can save you thousands of dollars.
Also, make sure to submit your student loan FAFSA (form) as early as possible for the best grant and loan opportunities. You can also check for grants or scholarships from your local civic organizations, your local community colleges and universities, and even your parents’ employers.
I hope you found this information useful. Adios, until next time!
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice.
