You may or may not find it shocking to learn that 43.5 million Americans owe money in the form of student loans. All told, U.S. student debt totals $1.78 trillion.
By contrast, total U.S. credit card balances came to $917 billion as of 2023's first quarter, according to TransUnion. Clearly, student loan debt is a much bigger issue.
If you're someone who's paid off student loans (or is currently still trying to chip away at those balances), you'll want to spare your children the burden of dealing with education debt. If you do the following, you might manage to help your kids keep their borrowing to a minimum or even avoid student loans completely.
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Save for as many years as you can
When it comes to retirement savings, many people have a pretty lengthy window. If you start working at age 22, for example, and retire at age 67, that's 45 years to sock money away in an IRA or 401(k) plan.
The problem with saving for your kids' college is that you generally only get an 18-year window, at most. But if you take advantage of it by beginning to save from the time your child is born, you can potentially amass a nice sum of money to pay for their education.
Let's say you manage to sock away $250 a month for college savings purposes over 18 years. If you invest that money at an average annual 8% return, which is a bit below the stock market's average, you'll end up with $112,000. Wait until your child is five years old to start saving and investing that $250 a month, and by the time they're 18, you'll only have around $64,500. That's not nothing -- but it may not be enough to cover a child's college education in full.
Find the right home for your college savings
Many people opt to save for college in a taxable brokerage account because these accounts give you the most flexibility with your money. But a better bet may be to save and invest for college in a tax-advantaged manner.
To that end, you could open a 529 plan, which will give you tax-free investment gains and tax-free withdrawals on money used to cover qualified educational expenses. The nice thing about 529 plans is that you're not locked into a single beneficiary. If you have multiple children and one opts out of college, you can transfer their funds to another child without penalty.
Another option to look at for college savings purposes is a Roth IRA. These accounts allow you to take penalty-free withdrawals for education expenses, even though they're primarily supposed to serve as retirement savings plans.
As is the case with a 529 plan, Roth IRAs allow for tax-free withdrawals, as well as investment gains. But to be clear, if you're going to save for college in a Roth IRA, keep those funds separate from the money you're socking away for your own retirement. You don't want to dip into your Roth IRA to pay for college if that money is supposed to serve as your personal nest egg.
It's unfortunate that 43.5 million Americans are currently saddled with student loan debt. But if you give yourself a longer savings window and invest your savings strategically, you might spare your kids the burden of borrowing for college and dealing with the consequences later.
