How Millennials are Changing the Student Loan Cycle
Millennials who were born in the 1980s are now adults and many of them already have families. They know what it’s like to start their adult life saddled with high student loan debt – 56 percent of people aged 18 to 29 have put off major life events like getting married, purchasing a car or home, or saving for retirement, because of student debt.
91% of millennial parents are determined not to perpetuate this cycle with their children. This is considerably higher than other generations – 76% of parents ages 36-45 and 74% of parents ages 46-55 said that debt caused them to use other strategies to cover college costs.
A study by the Washington-based College Savings Foundation reveals that Millennials are much better at delayed gratification – setting goals and saving to reach them. Even though they are struggling with their own student loan debt an increasing number of American parents believe in the value of a college education.
New figures from Labor Department show that a college graduate with a four-year degree earns 98% more per hour than those who did not go to college. And the gap is increasing – five years ago it was 89% and in the early 19080s it was 64%.
College Saving Strategies
The key to breaking this student loan debt cycle is to devise a comprehensive education savings plan as early as possible—even if the child was just born. This will help increase the chances that sufficient funds will be available when it’s time for them to start their college educations. Among the most popular education savings vehicles available to families today are:
• Section 529 Plans—This is the college savings plan of choice for many young families. Operated by states or educational institutions, they come in two forms: prepaid tuition plans and investment savings plans. Sec. 529 plans allow tax-deferred growth and tax-free distributions if the funds are used for qualified education expenses.
• Coverdell Education Savings Accounts (ESAs)—You can contribute up to $2,000 a year to a Coverdell ESA on behalf of a child or grandchild. Like contributions to Sec. 529 plans, Coverdell ESA contributions grow tax-deferred and can be withdrawn tax-free if used for qualified education expenses.
Note, however, that the money doesn’t have to be used for educational purposes. If the child doesn’t attend college, or receives scholarships and/or financial aid and doesn’t need the money for college, he or she will receive the money as a distribution.
• Zero Coupon Municipal Bonds—Unlike most other bonds, zeros do not make periodic interest payments. Instead, investors receive a payout of the full face amount of the bond at maturity. The predictability of the payout can make a zero coupon muni bond ideal for education funding, since you can structure the maturity to coincide with the start of your child or grandchild’s college education.
• Roth Individual Retirement Accounts— While Roth IRAs are usually thought of as retirement savings tools, many families today are also using them to save for college. This is because Roth IRA contributions (but not earnings) can be withdrawn for any purpose, at any age, without tax or penalty, including paying for college or private school. So one strategy is to withdraw Roth IRA principal for college and leave the earnings in the account for retirement.
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