How parents can help students avoid college debt before it starts

Parents can do more than they might think to help their children avoid the mounting student loan debt plaguing millions of Americans. 

It is never too early for families moving toward college to start thinking about how to dodge a burden that can delay adults from buying homes or having their own children. 

From maximizing the hunt for scholarships to properly handling savings accounts, parents are key to helping the next generation understand the cost of student debt — and how to alleviate it before it begins.

Educate on student debt

Most teenagers have never thought about the type of money needed to afford college, let alone what effect a large amount of debt can have on their lives. 

Explaining the finances of college has to include a full picture of what the cost encompasses, experts say, and not just the sticker price of an institution. 

“One of the things that we suggest for our families is to walk them through the calculation of the true total cost of college. We don't want to just talk about tuition. We want to talk about all the expenses, the true total cost of their education,” said Jocelyn Pearson, founder of The Scholarship System. “And then we want to plug it into a student loan calculator, figure out what will that monthly payment be once they graduate.” 

The conversation can include some rather awkward vulnerability on the part of the parents because explaining college costs should include giving children the basics of the finances of the house. 

“You can't have that discussion without having a discussion about what the household budget looks like, what your finances look like, as a parent how much money you make each month, said Bruce McClary, senior vice president of media relations and membership for the National Foundation of Credit Counseling.

It is also important when picking a college for applicants to be well versed on subjects such as the differences in cost between in-state and out-of-state universities, as well as going to a four-year school as compared to community colleges.

The cost of college has sent more than 45 million Americans into student loan debt, totaling more than $1.7 trillion in debt today.

The Biden administration has made efforts to erase at least $10,000 of student debt for all borrowers, but that plan was blocked earlier this year by the Supreme Court.

The Department of Education is working on a relief plan through the negotiated rulemaking process, but the effort will take months to even know the details of how much debt could be canceled this way and who would qualify.

529 Savings Accounts

A 529 is a highly recommended long-term savings plan that parents can start the moment they have a child. 

“I think as a parent a 529 plan should be on your way as soon as you take the baby home from the delivery room,” McClary said. 

The account is used to save money for a college education and has some tax advantages depending on the state where its holders live. They can be used for four-year institutions, community colleges and trade schools. They work similarly to the Roth IRAs individuals use for retirement savings. 

“For a 529 plan, in terms of for it to be effective, if you're thinking about in-state, four-year college, you should probably think about putting aside about $300 a month. That sounds like a lot of money, and it is, if you're putting in the regular deposits into your 529,” McClary said. “But again, what you're putting aside now helps you avoid going into debt with student loans or helps your child avoid going into student loans later in life.” 

Scholarships 

Scholarships are a great way to avoid debt and can be applied for starting at the beginning of high school and the whole way up to the senior year of college.

Parents should strong encourage applications as an average of $100 million in scholarships goes unclaimed every year, according to the National Scholarship Providers Association.

Pearson says that while big scholarships that cover full rides are great, "everyone is applying" for them, and most students "have a higher chance" at smaller awards.

“The other thing that I suggest looking at to find scholarships is looking local. So looking through their guidance office looking through even the financial aid office at college,” she said. “So again, remember that this isn't something that's over once we leave high school but something they can continue doing.”

Even if a parent has a 529 Plan for their child, scholarships can help free that money with little penalty and can go to other costs.

“If you want to use the money for non-education expenses, you pay a 10 percent penalty,” Pearson said. “However, one exception is scholarships. If you win a scholarship, you can remove that amount dollar for dollar out of the 529 without paying a penalty.”

Parent Plus loans

Parent Plus loans are not highly encouraged but are an option in situations where a family can afford it. 

They allow a guardian to take student loans out for their child but under their name so the debt does not fall on the student. 

But that means the debt is still on the parent and will need to be paid back. 

“If worse comes to worst and you do have to borrow and you're trying to help your college student avoid the full brunt of debt of student loans, then yes, in some circumstances it may come down to exploring options with Parent Plus loans,” McClary said. “But like any debt, this is something that you have to pay back, it has to fit into your budget and it has to be packaged affordably. You have to be very careful about taking on this type of debt.”