How to Send Your Kid to College Without a Loan

from daveramsey.com on 27 Mar 2008

Even though a college degree doesn't guarantee anyone a job or success, it can still be a great foundation for a successful career. But in order to send your kid to college, don't make the mistake of getting college loans.

Going into debt for college is a huge mistake, and a student loan will stay with your kid for years— so long, in fact, that the loan will become a family pet!

I want you and your family to be debt free, so here are three proven ways to send your child to college without going into debt:

Open an Educational Savings Account.

An Educational Savings Account (ESA) grows tax-free when used for higher education. You should fund the ESA in a growth-stock mutual fund. Right now, you can only invest up to $2,000 per year, per child, if your household income is under $200,000 per year.

How helpful can an ESA be? I'll show you. If you start investing just $166.67 per month ($2,000/year) from your child's birth to age 18 through an ESA averaging 12%, you would have $126,000 tax-free. That's great for most schools with inflation factored in!
Start a 529 Plan.

If your income rules you out of opening an ESA or you need to save more than an ESA allows, you may want to look into a 529 plan. 529s are state-school plans, but most allow you to use the money at any college. (That means you can save in New Hampshire's 529 plan and go to college in Kansas.)

There are many 529 plans out there but the best type is a flexible 529. Flexible 529s give you more control of your money by allowing you to move your investment around periodically. This is the only type of 529 that I recommend.
Get Creative!

My favorite methods of paying for school, other than savings, are grants and scholarships, most of which go unused. Scholarships are very useful if you're getting a late start at saving. You can buy software programs that list hundreds of thousands of available scholarships. One of my listeners, Denise, bought one of these programs, applied for 1,000 scholarships, and got accepted by 30. Doesn't sound like much, but those 30 scholarships paid her $38,000 for college!

You can also look into companies that have work-study programs. These programs pay for tuition based on one's employment with the company. UPS has a work-study program and so do many other companies. Of course there is also the option of serving in the military or National Guard, which will also pay for your tuition.

If you commit yourself to do at least one of the plans listed above, you can send your kid to college without taking on any debt. Most people know how to go about looking for scholarships by having their child talk with a high school guidance counselor, but very few people know how to start an ESA or a 529 plan.

To find out how to get started, contact an investment professional I recommend. The person you'll be connected with will be able to show you all the ins and outs of these plans and help you or a loved one get started preparing for a debt-free college career.

To learn more about paying for college, check out Financial Peace University. In the class, Dave teaches a whole lesson about the necessary steps to take to prepare for college funding.

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@Lynn- Yes, filling out the FAFSA is worth it. That is a big part of what got me through college. Don't click the box that says "I want loans," but this will at least tell you if you can get grants. You'll never know if you don't do it!! (P.S.- it's much easier to fill out online.)
Katie February 18 2010 11:14 AM

A great way to instill pride, self-esteem, and empowerment in your child is to not only leave the decision of attending college to them, but also to teach them how to invest early in their youth so that they can afford college out of pocket. My personal problem with grants/scholarships (public ones, not private ones) is that they come from the pool of taxpayer money. These taxes would otherwise have been used by parents and children to pay for college out of pocket with the proper financial education. Basically, like the lottery, we are taking water from the deep end of the pool and throwing it into the shallow end. A significant reason that you cannot afford college for your own kids is because you are financing the educations of others. Also, your purchasing power evaporates like boiling water. Private school is so expensive because public schooling exists: the leverage of the taxes from every working American vs. your disposable income. Paying for your kid's college is a personal decision you have every right to. But is it worth it for you to be the one to make that decision instead of your child(ren)?
Brandon February 15 2010 6:46 PM

This is the one area of the Baby Steps I'm struggling with. My daughter starts college next year and we have 1 years worth saved. I'd really like to know about legit scholarship software. Fortunately, My 11 year old son will have 100% paid for. We just started too late for my daughter. Andy
Andy February 12 2010 3:50 PM

I'm a college student in my 2nd to last semester. So far, my parents and I(through work experience) have been able to pay for my college tuition without loans. Unfortunately, now I've come to the point to start paying for my last semester and do not have the funds. I've looked at scholarships, but there are none I qualify for (most being for freshmen or more "needed" situations). I need help figuring out a viable option, preferably not a loan or maybe suggestions for a simple loan so I can finish and graduate. Thanks!
Alisha February 04 2010 9:12 PM

Where do I go to open an ESA account?
Chris O'Grady January 29 2010 9:19 AM

Where do you find this software about applying for college scholarships? I want to make sure I choose one that is legitimate.
Terri January 28 2010 2:54 PM

I would like to know if applying for FAFSA is worth filling out the paperwork even though we will(highly likely) not be eligible for need based tuition assistance. I really do not want to give the Federal Govt any more personal info that it already has on us. Any comments?
Lynn Alford January 14 2010 11:35 AM

names please of scholarship software programs.
ann lewonczyk January 14 2010 9:47 AM

What are the examples of software programs to expand the grant / scholarship search?
Michele Morton-Best November 28 2009 9:33 AM

The new Post 9-11 GI Bill is a great option for both service members AND their families because benefits (some or all) can be transferred to family members.
Kevin November 12 2009 7:26 AM

We have a student in college now and are also in a blended family. The ex will not contribute to her college so the ESA account may be a great option. We do not have the cash to put forth right away and need another alternative.
Cindy November 11 2009 2:35 PM

Our son would thrive at a private, liberal arts college. We're unlikely to get "need-based" aid, but we're not weathly enough to go out-of-pocket for that kind of tuition. College advisors, from school to outside services, say get rid of cash and take on debt to increase the likelihood of getting scholarships. That's 180-degrees out of phase with how we want to live! What a world.
Tamara November 02 2009 4:01 PM

This is so true!! I have paid for 100% of my college education (including tuition, books, and the majority of my two study abroad trips) with grants and scholarships. I have never borrowed a penny for school, and I will be graduating this December with ZERO student loans!! My husband has one loan that we will be paying off next year, and we both agree that I did it the better way. We can't wait to pay off this loan and be debt-free!! You CAN go to college without loans!!
Katie September 14 2009 6:10 PM