As a parent who dreams of sending your child off to college without incurring debt or taking on high-interest loans, it's important to research effective ways to finance your child's education, regardless of how old they are now. FinAid, a nationally recognized source for financial aid information, notes that parents who plan to finance their child's education can expect to pay close to two thirds of the total cost “through a combination of savings, current income, and loans.”
While at first, the idea of paying for college may seem overwhelming, especially given the multi-pronged approach listed above, it is easier once you begin to research and implement strategies for financing. This guide to financing your child's college focuses on a variety of savings, loans and federal financial aid options. First, however, it's important to know approximately how much your child will need for school.
When it comes to estimating the cost for your child to attend college, FinAid recommends planning on the cost of college rising at about twice the rate of inflation. The College Board released a report analyzing college costs over several years, for both public and private colleges and universities. In the 2012-2013 academic year, the total cost (tuition, fees and room and board) at a public 4-year institution was $18,170; at public 2-year institutions, the total cost was $10,700.
If you're estimating college costs for an older child who has some idea of what they want to study and where, you can use an online calculator like the one offered by CollegeSavings.org, which asks you to input the college type (2-year or 4-year), along with years until enrollment and the current single year costs for your chosen school.
The College Board explains the figures you should pay attention to when comparing cost figures for different schools:
- Net Price – The average net price is the amount of tuition, fees and room and board for a resident student living on campus. To determine the net price, you’ll need to subtract any student aid, loans or scholarships from the full published price. The U.S. Department of Education has an easy-to-use net price calculator. When you enter your school’s name, the tool takes you to that school’s calculator. Answer a few questions and you get an estimate of what attendance currently costs.
- Average Percent of Need Met – This figure tells you how much of a student’s financial needs the college or university typically covers.
- Average Percent of Aid – This refers to scholarships and grants offered by specific schools to help a student afford to attend.
There are many factors that go into college costs (such as scholarships, grants and loans) to keep in mind while estimating the cost for your child's education. Scholarships and grants are a fantastic way to pay for college, but not all students are eligible. For students who are not, using savings to pay for college is the next best option, since they aren't subject to the interest you will have if you choose a loan instead.
Know Your Savings Options
In figuring out the best way to save, there are several approaches you can take. The Internet is usually the first place people go when they need answers, and the resources you can find online, such as the ones previously cited on this page, are useful in terms of creating a college savings plan. However, you should meet with an expert, such as a financial planner or someone in your local bank, who can walk you through each savings option. They can answer any questions that arise while you are there, and they help you decide the best option for your family. The following savings options are also good places to begin:
529 Savings Plans
With 529 plans, you can create a fund that allows tax-free withdrawals for educational expenses. Every state offers a 529 plan, and there are two types of plans:
Prepaid Tuition Plans – These investment plans allow you to purchase as much or as little tuition as your student needs, and you will pay the price of education as it is today. As tuition costs raise, you will keep what you buy; if you pay for one year of tuition now, in ten years, you will still have one year of tuition. Either you or your child needs to reside in the state where the account is opened, but anyone in your family or circle of friends can contribute to the college fund.
Your student is not required to attend school in the state where this plan is opened. However, it will only cover in-state tuition costs and mandatory fees. Anything extra, such as room and board and the remaining tuition costs, must be paid by your family. These plans are a solid investment into your child’s future because they are guaranteed by the state, you can pay in lump installments, anyone can add funds, and the rising cost of education won’t change how much tuition you paid for when opening the account.
College Savings Plans – These plans also rely on investments made by you on behalf of your student. However, they are not guaranteed by the state, they are subject to the risky market, and they do not lock in the price of tuition; as the cost of education rises, so will the amount you need to invest. The benefits of this type of savings plan may outweigh the risks. The funds cover all qualified education expenses, including room and board and books. If your child decides that post-secondary education is not for him or her, you are able to switch the beneficiary of the account once a year to a close family member (e.g. first cousin, grandmother, aunt) or yourself.
These plans can be purchased for the state in which you reside, or you have the option of opening an account in another state through a financial advisor or broker. When it comes to taxes for this type of plan, more than 30 states offer tax deductions for these plans, but you have to be careful. Forbes notes that states match the timing of the contribution to the tax year when the deduction applies; if you make a contribution in 2013, that’s when you claim the tax deduction.
Coverdell Education Savings Account
A Coverdell ESA may be available to parents who meet specific income requirements – earning less than $110,000 (for single tax-filers) or $220,000 (for married, filing jointly). This is different from a 529 plan because the contribution itself is not tax deductible. Also, this account is not limited solely to college savings. However, the money accumulates tax-free until students begin spending on qualified educational expenses. Parents can use these accounts to save for elementary and secondary school expenses as well.
For higher education, qualified expenses include tuition, fees, room and board, books, supplies and equipment. Like with the 529 College Savings Plans, funds in a Coverdell ESA can be transferred to another qualifying beneficiary. This person must be a member of your close family and under the age of 30 at the time of rollover. If your child uses some of the funds but withdraws from school before finishing, the funds that are left can also be rolled-over to another beneficiary who meets the above criteria.
Penalty-Free IRA Deductions
The Internal Revenue Service allows individuals to take money out of their individual retirement accounts without incurring a 10.5 percent penalty, as long as the money is used for qualified educational expenses.
Savings Accounts & Money Market Funds
It is possible to save for your child’s education by simply opening a savings account at your bank and regularly contributing to it. Interest on savings accounts grows slowly, usually at cents on the dollar. If you open the account while your child is young, place a larger lump of money into the account and don’t touch that money, you will see an annual growth on the total. Talk with the bank that handles your checking account to learn about annual interest rates, account minimums, and if they charge fees. Working with someone you know and trust with your money ensures a secure account.
Money Market Funds are another secure, low-risk option for saving for your child’s educational future. These investments are made into securities where losses are rare, such as government securities and commercial paper of companies. The money you invest into these funds can be used towards your child’s education. Speak with a financial advisor or broker to discuss how to start such a fund and find the investment that works best for you.
Savings for Elementary School Students
Parents of elementary school children have a long time to save, which means flexibility in the way they plan those savings. Stocks and mutual funds allow you to take a relatively hands-off approach, though there is always a risk associated with the market, as it represents a higher risk investment. A 529 plan is a great option because you can save thousands of dollars for your child’s education with relative safety. You’ll get a tax deduction, and you won’t pay taxes as the account grows until you’re ready to take money out for your student’s educational expenses. Depending on where you are and what your state offers, you can create a prepaid tuition account, which focuses specifically on tuition expenses, or create a college savings plan that covers all educational expenses.
Savings for Middle School Students
As your child reaches sixth, seventh or eighth grade, you still have time to save for college. Both of the above options (the 529 plan and individual investments) work well, but there are other steps you can take to save as well. The IRS notes that qualified savings bonds may be cashed in for educational purposes as long as they are used for specific, qualified education expenses. It’s not too early to buy a savings bond for your child, but put it in your name. In this case, the bond holder must be 24 years of age before the bond’s issue date.
Savings for High School Students
By the time high school starts, your child may be able to communicate his or her educational preferences to you. Now is the time to step up your savings, or begin saving if you haven't already. If you haven’t started saving for your child’s education, and they are nearing the end of high school, it’s never too late to save, and you have options. You and your child should discuss his or her future goals in terms of their education.
Where do they want to attend school? How much do they need to cover tuition and fees? Both you and your child should open savings accounts and put as much money in them as you can. You and other family members may also start a 529 College Savings Plan in your student’s name. Though it may not accrue as much funds as it would if you had opened it when your student was younger, you may be eligible for a tax deduction, and anyone can contribute to this college fund.
Scholarships, Grants, Loans and Financial Aid
In addition to the variety of saving methods listed in the previous sections, there are other ways to finance your child's college education, including scholarships, grants, loans and financial aid. Your first step should be to fill out the Free Application for Student Aid (FAFSA). Everyone should complete the FAFSA, even if you think you’re ineligible for aid; it may find funds for your students you hadn’t considered. This form uses your information and your child's information to gauge how much financial aid they are eligible for.
The FAFSA also informs you if your child is eligible for work study or grants, two attractive alternatives to taking out a loan. The FAFSA requires your tax information, so have it handy when you and your child fill out their form, which needs to be filled out every year of college. Your child's junior and senior years of high school are a good time to begin looking for scholarships, which are a type of aid gifted to your child; this aid may be based on academic success, talent, culture, or heritage, among other things.
Because scholarships and grants do not have to be paid back, they represent the most effective way to “pay” for college. Being a parent means you’re always on guard and often stressed or worried about your child’s well being and their future. If you start early and do your research, you’ll successfully navigate financing your child’s college education. It’s never too early to find a college savings plan or method to finance college.
Financing college can feel overwhelming, but it doesn't have to be. With the information in this guide, and the additional resources we have listed below, you are better equipped to get creative and smart when paying for your child's college.
General Resources for Financing College
This resource list includes general guidelines for financing college including the FAFSA website and the official blog from the U.S. Department of Education.
- The National Association of Student Financial Aid Administrators
- 360 degrees of Financial Literacy
- Adventures in Education
- An Introduction to 529 plans by The U.S. Securities and Exchange Commission
- The Federal Student Aid Department
- The Official Blog from the U.S. Department of Education
The True Cost of College
Many college financing articles focus on tuition. These resources, however, focus on many other aspects of college that a student needs to be aware of including textbooks, room and board, food and transportation.
- Huffington Post's “College Textbook Prices Increasing Faster than Tuition and Inflation”
- Businessweek's “Food Costs Rise for College Students”
- Bankrate's “Surprise! College Costs Even More”
The Money Saving Mindset
Sometimes saving for college is as easy as hunkering down and putting aside money each week or each month. These resources are all about how to save money the old fashioned way.
- CNN's “How to Save More Cash”
- Forbes' “11 Life Hacks–For Your Wallet”
- Money-saving Questions Answered by Financial Expert, Suze Orman
Reduce College Costs with These Creative Ideas
From earning credit for previous experience to volunteering for AmeriCorps post college, these ideas are different than conventional options like federal financing.