7 ways to avoid student loan debt

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Paying for college doesn't have to break your budget. These common saving and investing strategies can help.
Most parents know how important a college education is in today's economy. According to a recent Sallie Mae report, 88% of parents believe that a college degree will create opportunities that the student wouldn't have had otherwise, and 78% are willing to stretch financially to make those opportunities available.Footnote 1
Still, college requires a hefty investment for most families. According to the not-for-profit College Board, the average in-state cost for a single year at a four-year public college or university in the U.S. for 2022-2023, including tuition, fees, and room and board, was $27,940. For students attending an out-of-state public college, that figure jumps to $45,240. For a private college, it's $57,570.Footnote 2
These eye-opening costs have caused parents to take a fresh look at the strategies they use to help pay college bills, says Richard Polimeni, director of Education Savings Programs at Bank of America.
"The reality of college costs is a major concern for most parents," he explains. "But it's also a great motivator because they want their children's lives to be better — and free from the kind of college debt they themselves may have taken on and, in many cases, are still paying off. Parents are planning and saving now to make that happen."
Polimeni outlines some of the key college savings and investing tactics trending with parents today.

1. Start early

"A few years ago, the average age of a beneficiary for a new 529 account was around 9 or 10 years old," says Polimeni. "Today, it's closer to 5 or 6 years old." Starting to take steps to save and invest earlier allows parents to take advantage of more years of potential growth through compound earnings over time, especially when using a tax-advantaged investing vehicle such as a 529 plan. Please remember there's always the potential of losing money when you invest in securities.

2. Save more, borrow less

Parents who may have only recently finished paying off their own college loans have a strong desire to save more and borrow less when financing their children's college education. Parents know that using savings is vastly less expensive than incurring debt, and 65% are actively saving for their children's college costs.Footnote 3 "We are encouraged to see that parents are avidly saving and are motivated to avoid taking on debt for themselves and their children," says Polimeni, who is also a former chair of the College Savings Foundation.

3. Set a realistic savings target

Parents are becoming more realistic about the amount of college costs they are willing to take on without jeopardizing their other priorities, including retirement savings, Polimeni says.
"We see a definite change from parents feeling that they have to finance 100% of college costs to realizing that there are a variety of other funding sources and strategies they can use in their saving efforts," he notes. "The objective should be to set a realistic goal that is achievable." Families should expect to cover 54% of college costs with income and savings, with the remainder coming from grants, scholarships and borrowing.Footnote 1

4. Take advantage of 529 benefits

The use of 529 plans for college investing is increasing, says Polimeni, because of their potentially significant tax and estate planning advantages and the flexibility they offer to change beneficiaries among family members.
Generally, 529 education savings plans offer the potential for tax-free growth, and any withdrawal (including the earnings portion of any withdrawal) is federal (and usually state and/or local) income tax-free if used for qualified higher education expenses. Although 529 plan contributions cannot be deducted from federal income taxes, many states offer residents a state income tax deduction for contributions to the in-state 529 plan. There are also a few states that offer a state tax deduction for contributions made to any 529 plan, not just the in-state plan.
In addition to certain traditional college expenses, you can take a 529 plan distribution, federally tax-free, of up to $10,000 per calendar year per beneficiary to help pay for tuition at an eligible elementary or secondary public, private or religious school. 529 assets can also now be used to pay for certain expenses related to registered and certified apprenticeship programs and to make qualified student loan payments up to a lifetime maximum of $10,000 for the designated beneficiary or a sibling of the designated beneficiary. The lifetime maximum is applied separately for the sibling's loans versus the designated beneficiary's loans, and such repayments may impact student loan interest deductibility. State tax treatment may vary.

Growth in the use of Section 529 plans

As college costs have increased, more people are utilizing education savings plans. The chart below shows the rise in 529 plan assets from 2010 to 2022.
Graphic showing growth in the use of Section 529 education savings plans totaling $388 billion in 2022.
Source: ISS Market Intelligence, 529 Industry Analysis 2022
Another advantage: 529 plans give the account owner the flexibility of changing beneficiaries potentially without income tax consequences if the original beneficiary doesn't go to college.
To understand your college investing choices and decide if a 529 plan is right for you, see our plan comparison chart.

5. Use bonuses, tax refunds and other windfalls

Today's college savers are also looking to a variety of funding sources, including bonuses, tax refunds, earnings from hobbies and inherited money, to fill the college funding gap before they resort to taking out loans.
Parents whose children are "graduating" from day care to public elementary school have been using another great option, says Polimeni. "They take the money they have been paying every month for day care and redirect it into a 529 education savings plan. It is an easy way to start saving for education without impacting your lifestyle."
Parents take the money they have been paying every month for day care and redirect it into a 529 education savings plan.
— Richard Polimeni,
Director of Education Savings Programs,
Bank of America
"When you find yourself in a situation where you suddenly have extra money every month that you're used to spending, it also can be helpful to set up a recurring automatic draft from your checking account to your 529 education savings plan account so you're not tempted to spend it on something else," says Polimeni.

6. Get a little help from friends and relatives

More parents are asking family and friends to make a contribution to their child's 529 plan in place of material gifts at birthdays, graduations and other holidays. According to a College Savings Foundation survey, 30% of grandparents have or plan to open a 529 plan for a grandchild.Footnote 4
The number of grandparents who are helping to pay for a grandchild's education through payment of tuition directly to the college or contributions to 529 plans is also increasing, Polimeni says. This strategy can also be beneficial for the grandparent's estate and gift tax liabilities.

7. Share costs with your children

Increasingly, parents are expecting their children to take on a portion of the college costs — and today's high school students are willing to do so. In the CSF's Annual Youth Survey, 59% of respondents said they were saving for higher education.Footnote 4
Of all the latest trends in college savings, perhaps the most important is to get started as soon as you can. Even if you can only save a small amount, every bit helps. "Every dollar saved is one more dollar that you won't have to come up with — or borrow — later," Polimeni says.

Next steps

Footnote 1 Sallie Mae, "How America Pays for College 2022," Aug. 2022.

Footnote 2 College Board, "Trends in College Pricing and Student Aid," 2022.

Footnote 3 College Savings Foundation, "State of Higher Ed Survey," Oct. 2022.

Footnote 4 College Savings Foundation, "13th Annual Youth Survey," May 2022.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Before you invest in a Section 529 plan, request the plan's official statement from your Merrill Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.