Parents can and do find ways to pay for
their child’s college, but it often involves sacrifice and planning. Two keys:
Save early and consistently.
Starting as soon as possible and making
regular deposits into whatever vehicle you choose can help smooth out the ups
and downs of the stock market.
Consistently making equal payments also
makes the task of saving easier.
Related: How college financial aid works
How Much Will I
Need to Save?
The answer to this question is
subjective. Do you plan to try to cover 100% of your child’s college costs, or
will student loans, if needed, be palatable? Will your child likely qualify for
need-based or merit aid? Might your high achiever be eligible for a college on
the list of schools from Amherst to Yale that meet all demonstrated need?
Have you carved out your own retirement
savings plan and an emergency fund and focused on paying down your own debt?
It’s smart financial planning to get your house in order first, so you can save
for your offspring’s college.
The cost of
attendance, or “sticker price,” on every college website that
estimates the total cost of a year of school can cause, well, sticker shock.
But most students do not pay sticker price. They pay the net price, that number
less scholarships, grants, and financial aid.
The College Board reports that the average published tuition and fees for
full-time students for 2021-22 are:
- Public four-year college,
in-state student: $10,740 - Public four-year college,
out-of-state student: $27,560 - Private nonprofit four-year
college, any student: $38,070
The estimated average net tuition and
fee price paid by first-time full-time in-state students enrolled in public
four-year institutions was $2,640 in 2021-22; and at private nonprofit
colleges, $14,990, according to the College Board.
Remember that the above numbers cite
tuition and fees, not the total cost of attendance, which also includes the
estimated annual cost of room and board, books, supplies, transportation, loan
fees, miscellaneous expenses (including for a personal computer), and eligible
study-abroad programs.
The upshot: Anticipating the cost of
attendance of various colleges, your family’s eligibility for merit and
need-based aid, and borrowing tolerance can help you prepare.
If you put a number on a savings target,
another key question is: How can I start
saving for college?
What Are Some
Strategies for Saving?
Here are a few options to consider:
Automating
savings. You could set up automatic
transfers to a designated college savings account, so you won’t even have to
think about it. You can transfer from your checking account or, if it’s an
option, opt to direct deposit a portion of your paycheck directly to your
savings account.
Putting
windfalls to work. Another way to boost savings comes
from the planned and unplanned windfalls in life. Getting a tax refund or
receiving an inheritance? Keeping an eye out for unexpected money can help you
achieve your savings goals.
Pruning
expenses. If you haven’t already trimmed
your expenses, you can use the natural course of time to turn expenses into
savings. For example, once your child no longer needs diapers, you can put that
cost toward college savings. When they no longer need day care, you could
funnel what you were paying into your account. If piano lessons end, it’s yet
another chance to increase how much you can save.
Finding
scholarship matches. Once children get closer to high
school graduation, you can help them find scholarships. FastWeb and
Scholarships.com are two popular sites among many that will help you search for
opportunities. Many allow you to set up a profile for your child that may
include interests, intended majors, and even preferred schools—data points that
will be used to help match your child with scholarships.
It’s usually more cost-effective to save
than borrow, of course. Every dollar you borrow can cost you more than that dollar
when you add interest.
Many parents use a mix of sources to
fund their children’s education. For example, you could save a third of your
target, pay a third during your child’s time in college, and borrow the last
third.
Which Savings Plan
Is Right for Me?
If you have your target goal and a plan
to make regular contributions, you’re ready to weigh which investment vehicles
will fit your needs. Here are some common savings tools.
529 Plans
The 529 college
savings plan is a tax-advantaged account to save for higher
education costs, and it has become popular with parents saving for college.
Anyone, even non-family members, can set one up and make contributions on
behalf of a beneficiary.
Contributions to 529s are made with
after-tax dollars, but they grow tax-free, and capital gains are tax-free as
long as withdrawals are used to pay for qualified education expenses. Any
withdrawals that are not used for higher education expenses may be subject to
penalties and taxes.
Another caveat: If your child doesn’t go
to college, the funds still need to be spent on education to avoid taxes and
penalties. But you have the ability to change the beneficiary of a 529 account
to another family member.
This means that if your oldest child does
not use the funds for college, you can change the beneficiary on the 529 to a
sibling or even a family member in the next generation. Even better news, if
your child receives a scholarship for college, you can withdraw the amount of
the scholarship from the 529 plan penalty-free. If you decide to withdraw it
for another purpose, you’ll pay a 10% penalty ,
plus regular income taxes.
Annual contributions to a 529 plan are
not limited, but any amount you give the beneficiary will be part of your
annual $15,000 gift tax exclusion. The IRS will let you (and your spouse, if
you elect to split gifts) make five years of contributions at once without paying
gift taxes.
Many states offer these plans, so you’ll
want to start by finding out if your state offers any tax incentives to
participate in your own state’s sponsored plan. If you discover that your state
does not offer additional tax benefits for contributions, you can shop around
for the lowest fees.
Then there are 529 prepaid tuition plans ,
offered by a dwindling number of states, that allow parents, grandparents, and
others to prepay tuition and mandatory fees at today’s rates at eligible
colleges and universities.
Most state prepaid tuition plans require
you or your child to be a resident of the state offering the plan when you
apply. Most allow the funding to be transferred to a sibling.
Qualified distributions from prepaid 529
plans are exempt from federal income taxes and might also be exempt from state
and local taxes.
The Private College 529 ,
not run by a state, offers guaranteed prepaid tuition at many participating
colleges and universities, with no residency requirements.
Coverdell
Education Savings Account
A Coverdell education savings account can
also be used to pay for qualified education expenses.
The annual contribution limit is just
$2,000. Contributions are made with after-tax dollars, but they grow tax-free,
and withdrawals for qualified expenses are tax-free.
The account is limited to certain
incomes. You can use a variety of investments to grow the account.
UTMA and UGMA
Accounts
A Uniform Transfers to Minors Act or
Uniform Gift to Minors Act custodial account can be set up to pay any expense
that benefits a minor.
When your child reaches the age of
majority, 18 or 21, depending on the state, they will be able to use the money
for whatever they want, so many parents are wary of using these to plan for
college.
The flip side is your child won’t be
limited to just paying for education expenses and can use the money for living
arrangements, a car, or other necessary purchases.
There are no contribution limits for
UTMA and UGMA accounts, and they can be funded with any combination of cash and
investments. Annual gift tax exclusions apply.
Because contributions are made with
after-tax dollars, there are no taxes on withdrawals, but there may be taxes on
capital gains.
What About Student
Loans?
While your student may have to take out
federal student loans to make it to graduation day, you can also shoulder some
of the load.
Parent PLUS loans can be one way to help
your child afford college. They are student loans offered by the U.S.
Department of Education, and parents become the borrower. You can borrow up to
the amount of education expenses not covered by other financial aid. It’s
easier to qualify if you don’t have an “adverse credit history.”
Parent PLUS loans have a fixed interest
rate, currently 6.28% , with a
typical term of 10 years that may be extended to 25 years. However, unlike
federal student loans, Parent PLUS Loans come with a fairly high origination
fee—it’s currently 4.228%.
Even with savings, federal student
loans, grants, and scholarships, your child may still have unmet needs. Private
student loans, offered by private lenders, are often used to fill those gaps.
Depending on your situation, student loan refinancing can
also lower your monthly payment. Many online lenders consider a variety of
factors when determining your eligibility and loan terms, however, including
your educational background, earning potential, credit score, and other
factors.
SoFi offers private parent student
loans, when you, the parent, take responsibility for the loan. SoFi
also offers undergrad private student loans that allow a cosigner. If you
cosign, you and the student are responsible for the loan.
It’s important to know that federal
student loans come with benefits, including income-driven repayment options and
student loan forgiveness, that private lenders do not offer.
The Takeaway
Paying for a child’s college education
involves two key things: saving early and consistently. Most students will
still end up borrowing in order to pay for the many expenses of higher
education.
When it comes time to fund the college
journey, keep SoFi Private
Student Loans in mind. They come with a fixed or variable rate
and no origination or late fees. Private student loans may not have the same
protections and benefits that come with Federal student loans and usually are
not considered until all other financial aid options have been exhausted.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Learn more:
- How to pay for college as an adult learner
- 26 tax deductions for college students & other young adults
Thisarticle originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Student Loan Refinance
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How to set up a college fund
It’s no secret that college tuition is growing at exorbitant rates in the U.S., and it seems as if there is a near-constant stream of headlines shouting the latest updates in the rising cost (and debt) facing Americans.
The average cost of tuition varies depending on whether the school is private or public. According to the College Board, these were the average inflation-adjusted costs across school types since 1971, including both tuition costs and fees for room and board:
• $48,510 at private, four-year, nonprofit schools
• $37,430 at public, four-year, state schools for out-of-state students
• $20,790 at public, four-year, state schools for in-state students
• $12,320 at public, two-year schools
And typically, tuition costs and room and board aren’t the only expenses college students will usually need to cover. There are textbooks and other school supplies, the cost of traveling to and from school for breaks and any additional living expenses.
As a parent, sometimes just thinking about the cost of college for your kid (or kids) can feel bleak. Thankfully, there’s no time like a bad time to start thinking about ways to save for your child’s education.
designer491 / istockphoto
The common advice is: there’s no time like the present to start saving. Even starting with a small amount each paycheck could make a dent when you’re looking at a tuition bill 10 or 18 years down the line. If you are in the early stages of parenthood, college may feel far off now, but time can fly.
There are a few savings plans and investment accounts that are specifically designed to help people save for their child’s education expenses.
As you get serious about saving for your children’s education, which some suggest starting within the first six months of your child’s life, one of these accounts may be worth considering.
marchmeena29 / istockphoto
These accounts are named after an IRS code section and give parents the option to save for college in the name of a child while providing certain tax advantages. There are two kinds of 529 Plans, prepaid tuition plans and education savings plans.
Prepaid tuition plans let individuals buy future credits or course units at participating colleges or universities. These credits are used to help cover the cost of tuition for the beneficiary. Most prepaid tuition plans have residency requirements and are often sponsored by state governments.
Education savings plans are investment accounts that can be used to save for the beneficiary’s qualified education expenses. The funds can be used to pay for higher education or private elementary or high schools. Money is taxed when it is contributed to the account, but it can then grow tax-free.
You can’t contribute more money than necessary to cover education expenses, and there are no annual contribution limits set by individual states. There are, however, aggregate limits to 529 plan balances, which vary depending on the state.
California has the highest aggregate limit, at $529,000, and Georgia and Mississippi have the lowest, at $235,000. While there are no contribution limits, it is important to note that in certain circumstances there may be additional taxes involved if contributions to a single beneficiary are more than $15,000 during the year.
If the child decides not to go to school, the account can be rolled over into the name of another family member. If the funds aren’t used for education-related expenses, there may be taxes and penalties.
Generous family and friends can also contribute to a child’s college savings plan. They may choose to make deposits to an existing 529 account or set up one themselves, naming a beneficiary of their choosing.
DepositPhotos.com
This account has more limitations but may offer more features for some. Individuals who have a modified gross adjusted income (MAGI) that falls below $110,000 ($220,000 if filing jointly) may be eligible to save for college using a Coverdell Education Savings Account.
There can be up to $2,000 in contributions for a single beneficiary in a given year. Contributions are made after taxes and must be made in cash. Typically, the funds can be withdrawn without a fee to be used for qualified education expenses.
designer491 / istockphoto
This custodial account allows your child to own stocks (just like an adult) and mutual funds. The custodian still controls the account until the minor reaches legal age. Note that it’s not tax-free. It also may reduce the amount of financial aid eligibility.
smolaw11 / istockphoto
Although generally used for retirement savings, IRAs can at times be used to pay for the cost of college. There are two types of IRAs: Traditional and Roth. The main difference between the two:
• Roth IRA: The taxes on the account are paid up front and money withdrawn in retirement is generally tax-free.
• Traditional IRA: Taxes are paid when the money is withdrawn.
Generally, to make fee-free withdrawals from an IRA, the account holder needs to be at least 59 ½ years old. But Roth IRAs can be used to pay for qualified education expenses including tuition, books and supplies. Individuals can generally avoid the 10% early withdrawal fee if the account has been open for at least five years or if it is used for qualified education expenses.
Keep in mind that while there may not be an early withdrawal fee, the earnings withdrawn will still be subject to income tax.
designer491 / istockphoto
Even after years of diligent saving, paying the full cost of college tuition isn’t an option for some families. There are a few options to fill the gaps and help students pay for college.
Students getting ready to start college or those who are already enrolled could look into options like scholarships, grants, or private student loans.
Consider filling out the Free Application for Federal Student Aid (FAFSA). This is the first step in qualifying for federal aid including scholarships and grants, work study and federal student loans.
istockphoto/jacoblund
These can be a powerful asset when paying for college since it’s money that doesn’t have to be paid back.
Scholarships are typically merit-based and can be offered through a variety of different types of organizations like local nonprofits, corporations, or even sometimes directly from universities. There are a number of searchable databases that compile different scholarship opportunities.
Picsguru / istockphoto
These are also sources of funding that don’t need to be repaid. Unlike scholarships, grants are typically need-based.
The US Department of Education offers federal grants to students, including Pell Grants, Teacher Education Assistance for College and Higher Education (TEACH) and even Iraq and Afghanistan Service Grants.
DepositPhotos.com
The federal work-study program provides part-time jobs for undergraduate, graduate and professional students with financial need. These jobs allow them to earn money to help pay education expenses.
Trish233 / istockphoto
There are two types of student loans: federal and private. Federal student loans are awarded as a part of your financial aid package and can either be subsidized or unsubsidized.
Subsidized student loans are awarded to eligible undergraduate students based on need. The federal government covers the interest on these loans during the time the student is in school at least half-time, during the six-month grace period after leaving school and during deferment periods.
Unsubsidized student loans are not awarded based on financial need, and are available to both undergraduate and graduate students. The borrower is responsible for paying the interest on a Direct Unsubsidized Loan from the time of disbursement. If the borrower chooses not to pay the interest while in school, during grace periods, or while in deferment, the interest will accrue and be added to the loan principal.
Private student loans are borrowed from a privately owned lending institution. Typically, to get a private student loan, lenders will evaluate the borrower’s credit history, which isn’t the case with most federal student loans. This is why some borrowers rely on a co-signer to secure private student loans.
Typically, borrowers will be required to begin making payments on private student loans right away, even while they are currently attending school.
DepositPhotos.com
Some parents might consider taking out a parent student loan to help their kids pay for college. The federal government makes Direct PLUS loans available to parents and graduate students. The current interest rate on a Direct PLUS loan is 7.08% and it’s fixed for the life of the loan. It’s recommended to exhaust all federal benefits first.
designer491 / istockphoto
Saving for your child’s education is important, but so are your other financial goals and priorities like setting up an emergency fund and saving for retirement. A realistic financial plan and budget could be a useful tool to help you as you work toward each of your goals.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here undergraduate student loans rates. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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