As a parent, you want the best for your kids—even if that means making some financial sacrifices. But is there a limit to what you would do to ensure your kids have the best chance at a bright future?
This is a question many parents ask themselves when deciding whether or not to help pay for their child’s college education. In the end, many parents decide to help their kids through college. But this choice could have unintended consequences.
In a recent Freedom Debt Relief survey, we found that helping pay for your kids’ college education doesn’t just delay your financial goals like saving for retirement. It could also negatively affect your health and emotional well-being. So before you decide to help pay for your kids’ higher education, find out how this decision has affected other parents like you.
Parents Delay Financial Goals to Help Their Kids Through College
According to Sallie Mae’s 2018 study, 44% of college costs were paid using parents’ income, savings, or loans in the 2017-2018 school year. With an average cost of $26,458 for an undergraduate education in that year, parents spend about $11,641.52 yearly on their kid’s college education.
When confronted with an additional expense averaging nearly $12,000 per year, something’s got to give. Typically, parents who help pay for their kid’s college tuition end up delaying their personal financial goals.
More than delaying long-term goals, parents who help their kids through college sometimes end up in a worse financial position because of their decision.
According to our survey, 33% of parents said they can’t save money because they’re using it to pay for their kid’s college tuition. 22% are taking on credit card debt, 13% have missed payments on their bills, and 17% can’t pay their other debts because they’re helping their kids pay for school.
Parents Report Heightened Physical and Emotional Stress
In addition to the financial pressure that parents feel when they help pay for their children’s college education, 49% also report increased physical and emotional stress.
Parents who help kids pay for college may face significant financial burdens that end up negatively affecting their health, personal relationships, and psychological well-being.
But as a parents, it’s difficult not to help your kid through college. After all, you don’t want to see them shackled with heavy student loan debt. Luckily, there are some actions you can take to prepare for the cost of your child’s college education.
How to Prepare for the Cost of Your Kid’s College Education
Whether you’re a new parent or about to send your kid off to college, there are a number of things you can do to prepare to help your kid through college.
Save into a 529 Plan
A 529 Plan is an investment account that allows you to save a large amount of money for your child’s education without paying taxes. In 2018, you could save up to $14,000 into these accounts without incurring taxes. The money you invest in a 529 Plan grows with the market, and once your child is ready to go to college you can withdraw the money to pay for tuition.
It’s best to start a 529 Plan early. The more time you have to invest into this fund, the more money you’ll have when it comes time to send your kid off to school.
Start an Education Savings Account (ESA)
Education Savings Accounts, or ESA, work similarly to a 529 Plan in that the value of these accounts grow with the market. These accounts are also tax-benefited and could help you save up for your kid’s college education. However, you can only contribute a total of $2,000 into these accounts per year.
In order to qualify for one of these accounts, your Adjusted Gross Income also has to be less than $110,000 if you file individually and less than $220,000 if you file jointly with a spouse.
You can save into an ESA on top of a 529 Plan, or use it as your primary means of savings. If you start saving when you kid is born, you could end up saving $36,000 by the time your kid is ready to go off to college.
Consider Using Your Home Equity
If your child is about to go off to college and you have equity in your home, you may consider using your home equity to pay for your kid’s college education. You can do this by taking out a home equity loan, HELOC, or by doing a cash-out refinance. However, there are certain risks involved in using your home equity to cover college tuition.
When you borrow from your home equity for any reason, you put your home at risk. After all, if you aren’t able to pay back the loan, your mortgage lender has the option to foreclose on the home to get back what they’re owed. So make sure that you can cover the new expense of a home equity loan before you use your home equity to pay for your kid’s school.
Know When to Draw the Line
As much as you may want to sacrifice to help you kid get through college without accruing a ton of student loan debt, it’s important to know where to draw the line. You have goals and financial obligations of your own, and you need to make sure that you’re staying the course.
That doesn’t mean you shouldn’t help your kid through college. You just need to understand exactly how much you can contribute to tuition, room and board, and any other expenses—and make sure to set expectations with your child on how much you can help them.