Gifts That Pay Off: Help your children save for college and pay off student debt

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This story is part of a new MarketWatch series, “Gifts that pay off.” Between now and Dec. 25, we will look at gifts that could potentially earn the recipients money or improve their lives.

There’s a reason the phrase ‘gifts that keep on giving” is rarely accurate. But here it really works. But this year, consider one of the few gifts whose worth truly multiplies: help paying for college or repaying student loans. A $100 put in a college savings account on behalf of a little one will likely balloon by the time they reach college-going age. How the savings might accumulate? If parents contribute $250 a month to their children’s college savings accounts from birth until age 17, assuming a 4% return, that money will grow to $73,116 by the time the student is ready to go to college, with $23,111 coming from earnings, according to Mark Kantrowitz, a financial-aid expert.

Putting money toward a 20-something’s student debt — if done correctly — can also shave off some of the time they’ll spend paying off the loan in the long run by cutting down the base on which interest builds. What’s more, research indicates that simply knowing that money is being saved for college — even if the amount is less than $500 — may encourage students to attend.

And of course the item this money helps to buy, a college degree, provides value for a lifetime. “A college education produces income,” Kantrowitz said. “Therefore it is a gift that keeps on giving and in fact it has a tremendous impact on future livelihood of the individual. It’s probably one of the best gifts you can give.”

Here are a few ways you can give it:

MarketWatch photo illustration/iStockphoto

This story is part of a new MarketWatch series, “Gifts that pay off.” Between now and Dec. 25, we will look at gifts that could potentially earn the recipients money or improve their lives.

Give a gift through a crowdfunding website

Over the past few years, crowdfunding has become an increasingly popular way to pay back student loans and there’s even a website that allows borrowers to fundraise specifically for that purpose.

Through Loan Gifting, family and friends can contribute directly to a borrower’s student loan. Borrowers link their student loan accounts to a profile on the site, which bypasses the borrower’s student loan servicer. Loan Gifting also offers borrowers a dashboard they can use to track the gifts and manage thank you notes. The company charges a 3% fee for gifts and the platform that manages the payments charges a 2.9% fee on the back end. Though that might seem relatively steep, it’s in line with other crowdfunding platforms and it may be worth getting rid of the hassle of tracking down a borrower’s account number and coordinating with their student loan servicer to make a gift.

The site also provides wording to help make borrowers more comfortable seeking gifts from their friends and family. “That’s the hardest thing for people with student debt to realize — your family feels the need to do something about your student debt,” said Ravi Sawhney, the founder of the company.

Still, borrowers should be careful when using the site to refinance a loan. Loan Gifting recently expanded into offering other services, such as the ability to refinance a student loan at a lower interest rate. Borrowers who are using the site to receive gifts should evaluate those offers based on their individual circumstances. Often it may not make sense for a borrower to refinance their federal student loan because they lose the protections offered by the federal government.

Buy a ‘Gift of College’ gift card

Gift of College, a platform gift-givers can use to contribute to their friends or relatives’ college savings accounts and student loans, offers gift cards that can be bought at several retailers. So far, about 25,000 cards were bought and redeemed this year, according to the company’s founder, Wayne Weber. The card may come with a fee, depending on where you purchase it and how much you put on it, but the maximum cost is $5.95.

To use the cards, borrowers or holders of a 529 account — a tax-advantaged college savings plan — create a profile with the site and link their student loan or 529 account to their profile. Then they can use the site to redeem the gift cards from friends or relatives for contributions to their student loan pay down effort or 529 plan.

For 20-somethings managing their student debt, the profile can serve as a registry of sorts for the holidays or graduation parties. For younger kids, contributing to a 529 may be a harder sell. That’s why Weber suggests taking the total amount of money you might spend on a gift and splitting it between a toy and a contribution to their 529 account.

“I was the cool uncle that wanted them to have the toy,” he said. “I’m still going to give them that toy.” But Weber also recommends explaining what it means to contribute to their college savings — that you believe in them — to help the kids understand the gravity of the gift.

Creative ways to help students and student loan borrowers

• Studying abroad can be an important experience for many college students, but it can be costly — sometimes even more expensive than the cost of a semester at home. That’s why Phil Schuman, the director of financial literacy at Indiana University, suggests giving college students money to defray those costs.

Even if you’re not prepared to give a gift worth thousands of dollars, helping a student with the cost of a flight or activities while abroad can mean the difference between a student’s ability to study abroad or not. Often students will wind up spending several hundred dollars beyond program fees on things like airfare, travel and basic living expenses. “Gift giving for me is not as much about things as it is about experiences,” Schuman said. (That’s true for the average millennial too.)

• Offer to help pay down debt after graduation: Telling college students you’ll contribute to their loan repayment efforts can help motivate them to graduate, Kantrowitz said (the average monthly student loan payment is $346, according to Kantrowitz, but it really varies by type of loan and income). More important, it also means the gift won’t affect their financial aid eligibility.

Next: Gifts that will encourage your child to become a savvy investor