Every parent dreams that their child will strive for the "brass ring"—a college education that kick-starts a career and a promising future. But these days, that dream is at risk of being tarnished by America's student-debt crisis.
The average annual cost of a 4-year in-state public college, including tuition, fees, and room and board, is $21,950 for the 2019–2020 tuition year, and $48,870 per year for a 4-year private college, according to the College Board.1 No wonder the average graduate in the class of 2018 left college with $29,800 in student loans.2
What to do
"The key is to think ahead and figure out how much in college expenses you can afford," says Melissa Ridolfi, vice president of retirement and college products at Fidelity.
Once you have determined how much you can afford, focus your application process on colleges that fit your budget. Fill out the Free Application for Federal Student Aid (FAFSA) form to find out what grants, scholarships, and financial aid packages each college offers based on your family's expected contribution. Finally, compare total costs.
"If you need to borrow, look first at student federal loan options, because they generally have better rates and repayment terms," says Ridolfi. Also, consider looking at state-sponsored loans, or visit your state's higher education office. For a list of such institutions, visit Ed.gov.
When shopping for federal student loans, keep in mind that there are 2 types—need based and non–need based. Federal Subsidized Stafford loans are need based. Federal parent PLUS loans and unsubsidized Stafford loans are not, although parent PLUS loans have eligibility restrictions. Consider each of these loan programs, as well as taking out a home equity loan or line of credit, if available (see chart below).
In financing your student's college education, it's important to shop based on a variety of factors, including loan availability, interest rates, loan terms, and flexibility of payments. For example, let's say you need to borrow $30,000. As you can see in the chart, your interest rates and monthly payments can vary considerably—but so can the structure of your payments, including when you start and when the final payment is due, as well as your ability to qualify.
Federal loan options
Let's take a closer look at the options for federal student loans.
Beyond federal loans
Keep in mind that there are other college financing options beyond federal loans.
Tips for students
For students already enrolled in college or graduating with outstanding debt, here are some tips to understanding, managing, and paying off loans:
Tips for parents
For parents, it's critical to make sure that helping their child pay the college tab won't shortchange their own home equity, retirement savings, or other short- and long-term financial goals. "Parents must do a trade-off analysis and remember they can borrow for college but not for retirement," Ridolfi suggests.
Considering the mounting burden of student-loan debt, most financial experts concur that the best way to reduce the burden is to launch a college savings strategy for your child as early as possible.
The good news is that there are tax-savvy accounts that can help you save. Among them:
In the end, the more you save, the less you have to borrow. You don't want your newly minted college grad trapped in a debt bubble that could limit their financial future.
Next steps to consider
Open a flexible, tax-advantaged 529 college savings plan.
Confirm you're on track with our college savings calculator.
Learn how college savings plans work, including tax savings.