Most families don't plan for college debt, study finds

Not thinking ahead about college costs could mean your child has to take out more student loans.

Only two in five families, or 39%, had a plan for how to afford all two or four years of college, according to a new Sallie Mae report,“How America Pays for College 2016.” Students whose families had a plan borrowed one-third less in student loans than students whose families didn’t. The percentage of families that plan ahead has stayed relatively stable since Sallie Mae started tracking it in 2010.

The report, which surveyed 1,598 undergraduate students and parents of undergraduate students, didn’t address why more families don’t strategize about paying for college. Some families — particularly those with low incomes — may not be informed about how to pay for college, or they simply may not have time to do the research on their own, says Bianca Martinez, a former College Advising Corps advisor who now consults with students and families privately.

Additionally, some families are afraid that if they save too much for college, they won’t qualify for as much financial aid, Martinez says. But while that could be true to some extent, she still encourages families to save.

“It’s better to be overprepared than underprepared,” Martinez says.

Make your plan to pay for college

Getting started can be the hardest part, so here are some tips to kick off your paying-for-college plan.

LOOK AT HOW OTHER FAMILIES DO IT

The average family paid 41% of their 2015-16 college costs through parents’ and students’ combined income and savings, 34% of costs through grants and scholarships, 20% of costs through student loans taken out by students and parents, and 5% of costs through help from family and friends, according to the report.

Your paying-for-college plan will likely include a similar mix of funding sources, but the exact breakdown will depend on how much you save, how much you can afford to pay out-of-pocket, and how much need- and merit-based aid your student qualifies for.

TALK ABOUT MONEY AS A FAMILY

Discussing money is uncomfortable for some families, but it’s important for parents and children to be on the same page about what type of schools the family can reasonably afford. Aim to have this conversation by your student’s junior year of high school.

KEEP YOUR OPTIONS OPEN

At first blush, community college may seem to be the least-expensive college option and private four-year schools the most costly. But just because a school’s sticker price is higher doesn’t mean it will cost you more; you have to factor in the financial aid your student qualifies for at each school. Don’t rule out a school until you fill out the Free Application for Federal Student Aid, or the FAFSA, and see how much aid each school offers your student.

SET SAVINGS GOALS

Saving for college is about narrowing the gap between the money you have and the money you need. Take stock of the money you already have saved, and use a tool like the Financial Industry Regulatory Authority’s college savings calculator to help you estimate how much you need to set aside each year to meet your future college expenses. Keep the money in an account where it can grow, such as a Roth IRA, a 529 college savings plan or another college savings account.

DON’T SCRIMP ON RETIREMENT SAVINGS

Set aside money for retirement before contributing to your student’s college fund each month. In the worst-case scenario, your student can borrow money to pay for college, but you can’t necessarily borrow money to fund your retirement.

BE SMART ABOUT BORROWING

Although it’s not ideal, taking out some student loans isn’t the end of the world. Student loans are considered “good debt,” because college is an investment in your student’s future. Students should borrow all the federal student loans they can before consideringprivate student loans. And as a rule of thumb, students should only borrow — throughout all of college — as much as they expect to earn in their first year in the workforce.

Planning ahead for how to pay for college will curb stress as well as give you a financial boost, the report found. Julia Clark, senior vice president at Ipsos Public Affairs, the company that partnered with Sallie Mae on the report, says she personally felt relieved once she put a little money into a 529 college savings plan for her 4-year-old daughter.

“You don’t have to put tens of thousands of dollars away right away,” Clark says. “Just getting a little bit going offers some psychological relief.”

This article first appeared in NerdWallet.