How to pay for college

Financial planning

The lifetime benefits to those earning a college degree compared to only a high school diploma can be considerable, including:

  • Higher earning potential
  • Better benefits and job security
  • Greater job satisfaction1

By one estimate, a bachelor’s degree recipient generates 60 percent more in median weekly earnings than a person with a high school diploma.2 The challenge is that the cost of college education has risen dramatically in recent decades.

If one of your goals is to financially help your children through college, it’s important to put a consistent, well-planned savings and investment strategy in place early. The sooner saving begins, the more time money has to potentially grow.

Here are four steps that may help you identify and reach your college savings goals.

1. Estimate the total cost of college

College expenses vary based on a variety of factors. One of the most important variables is the tuition, fees, room and board charged by specific institutions.

  • The average annual cost of tuition for a four-year public, in-state college for the 2019–2020 academic year school year is $10,440, increasing to $21,950 with room and board.3
  • Private colleges have higher costs of tuition with an average of $36,880 annually, increasing to $49,870 with room and board.3
  • A child born today can expect that a four-year degree will cost over $200,000 at a public, in-state college and approximately $440,000 at a four-year private college, assuming a 5 percent annual increase in costs.3

The actual cost of college can also include books, supplies and other living expenses. But don’t overestimate the value of scholarships, grants and work-study programs to cover the cost of college. Typically, these sources will help offset about one-third of the total cost of attending a college or university.4

However, the remainder needs to be paid through a combination of savings, current income and loans. Relying on student loans to pay for college can ultimately be more expensive when the total cost of borrowing funds is factored into the equation. Setting aside savings in advance reduces or possibly even eliminates the need to borrow.

2. Identify savings goals

Some parents choose to pay for all of college, allowing their child to enter the “real world” with as little financial burden as possible. Others feel that their child will have a greater chance of success if they share a vested interest by paying for a portion of college. In fact, 61 percent of middle-income families believe the obligation of paying for college should be shared between the student and the parent.5

Create your plan based on what works best for your family and consider making how you pay for your children’s college education a family matter. You and your children (when they reach an appropriate age) should openly discuss it and start setting goals, such as the desired schools and expected living expenses. These conversations can help your children better understand that they have a stake in this matter and should be expected to help contribute.

3. Determine your monthly contribution goal

The best method for saving is often thought to be starting early and contributing on a monthly basis. Financial experts suggest striving for at least 70 percent of future college costs. Figure out how much you can contribute to the fund monthly and re-evaluate the contribution regularly.

4. Establish a savings plan

Understanding the features and tax benefits of college saving vehicles can help you develop an appropriate plan for your family’s situation. Savings plans can include one or more of the following:

  • 529 Savings Plan: A state sponsored, tax-advantaged savings or prepaid tuition plan for K-12 and higher education expenses. When owned by a parent, funds cannot be weighted more than 5.64 percent in the federal student aid calculation, meaning that is the most that would be expected of the fund for federal student aid. Talk with a financial professional to determine the right state plan for you.
  • Coverdell Education Savings Account (ESA): A tax-advantaged savings plan for K-12 and higher-education expenses. You must meet income requirements to qualify for contributions to ESA.
  • Custodial account (UGMA/UTMA): The Uniform Gift/Transfer to Minors Act accounts are managed for the benefit of a minor. The account is in a child’s name, can be used for anything and transfers to the minor at age 18 or 21. This means that your child may choose to spend the funds on something other than education. Also, UGMA/UTMAs count as student assets, which, in the Free Application for Federal Student Aid (FAFSA) calculations, mean that the students will be expected to draw down 20 percent of the balance to finance their education each year.
  • Qualifying U.S. Savings Bonds: Series EE (issued after 1989) and Series I Savings Bonds can be used to fund higher-education expenses.
  • Traditional & Roth IRA: These tax-advantaged retirement savings plans may also be used for higher education expenses.

It’s important to put a consistent, well-planned savings and investment strategy in place early. The sooner saving begins, the more time money has to potentially grow.

In addition to traditional savings or loan options, the rising cost of education encourages thinking outside the box. Here are a few less traditional means of funding college.

  • Enlist support from family and friends: Consider an “all in” saving strategy that incorporates contributions from grandparents, relatives and friends. When relatives and friends ask about gifts for the kids, suggest contributing to a child’s college saving plan rather than giving toys or clothes.
  • Grandparent strategy: When grandparents pay tuition directly to the institution, it is not considered a gift and does not count against the annual gift exclusion of $15,000 per year, per student, per grandparent. This means that two grandparents could give $30,00 to each grandchild. However, a monetary gift to a student counts as untaxed income to the student, which can reduce aid eligibility on FAFSA.
  • Tax return: Earmark a percentage of tax return refunds to go to the college fund.
  • Rewards credit cards: Some credit cards offer cash back rewards and others are directly connected to a 529 plan. Put those rewards in the college fund.
  • Grants and scholarships: Apply early and for all that fit the student’s criteria. This is “free” money and doesn’t need to be repaid. Start your scholarship exploration before your child starts high school and keep accurate records. Many scholarships require documentation of specific classes, volunteer activities, clubs, honors, and elected positions for the entire high school period. Keep similar records and continue to apply for scholarships during college years.
  • 401(k) loans: If the plan has loan provisions, you may borrow without penalties or income taxes. The loan must be paid back with interest.
  • Permanent life insurance: Withdraw a certain amount of the paid premiums without paying taxes or a penalty. Some policies allow holders to take out a loan using the cash value of the policy as collateral.
  • Home equity line of credit: HELOC interest may be deductible at the state income tax level and have a low impact on financial aid eligibility. Check with a financial professional for details.

Education saving is one of the top financial goals for any family. The sooner you start, the more likely you are to build a significant pool of money to help offset the significant costs of higher education.

Learn more about your options for funding an education