It’s not so easy being a college kid these days. The job market for recent graduates has been shaky while, at the same time, students are leaving school with more debt than ever before. If you have children who will someday be attending college, should you be worried?

You might indeed have cause for concern. Americans now owe more on student loans than on credit cards, according to the Federal Bank of New York, the U.S. Department of Education and other sources. For the college Class of 2011, the most recent year for which figures are available, the average student loan debt was about $26,500, according to the Institute for College Access and Success’s Project on Student Debt.

This type of debt load, coupled with the struggles to find a well-paying job commensurate with their education, is causing many recent graduates to get off on the wrong foot in terms of developing savings and investment strategies that could help them throughout their lives.

So, what can you do?

If you want to help your kids pay for college, you may want to consider a 529 plan. When you invest in a 529 plan, all withdrawals will be free from federal income taxes, as long as the money is used for qualified college expenses (However, non-qualified withdrawals may be subject to ordinary income tax plus a 10 percent penalty on the earnings portion). Contribution limits are high, and, contributions may be eligible for a tax deduction or credit for residents in certain states.

A 529 plan, while valuable, is not the only college savings vehicle available. You may also want to consider a Coverdell Education Savings Account, which, like a 529 plan, can generate tax-free earnings if the money is used for higher education expenses. However, a Coverdell account’s contribution limits are much lower than those of a 529 plan. You could also establish a custodial account, known as an UGMA or UTMA, which offers some tax benefits and no contribution limits.

Nonetheless, while these vehicles may help you save and invest for college, they may also divert resources that you might have used for other financial goals — such as a comfortable retirement. Of course, it’s not an “either-or” situation — there’s nothing stopping you from contributing to a 529 plan, Coverdell account or custodial account along with your 401(k) and IRA.

Clearly, though, it will take discipline and perseverance on your part to save and invest for both your children’s education and your own retirement. Like everyone else, you don’t have unlimited resources. But you do have another ally — time. The earlier you begin investing for education and retirement, the greater your chances of achieving your goals in these areas. And by understanding how your goals interact, you can work to make sure you don’t inadvertently derail one when saving for another.

Avoiding the student loan “debt trap” while still making progress toward your retirement savings will require creative thinking — and both you and your children may have to make some sacrifices along the way. But the ultimate goals — a college degree that isn’t one big IOU and a comfortable retirement — are worth the effort.

This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Kim DeVoss, CFP. Reach her at (480) 785-4751 or Kim.DeVoss@edwardjones.com.

(1) comment

Loreen

You know I think parents are ready to accept almost tall of the advices these days to help their kids to skip paying off their student loans for lifetime. Luckily, I did have this problem but I need to prepare to this issue beforehand even though my kind is just 5 years old. Hopefully by the time he needs to send applications to school our country is going to be debt free (this includes: mortgages, credit card debts and payday loans online). I am going to investigate this plan and consider sticking to it. Thanx a lot for the post. It would have been wonderful if you could also post some feedbacks probably.

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