Your child’s college tuition is undoubtedly one of the larger expenses they will encounter in your lifetime. According to the Annual Survey of Colleges by the College Board, average college tuition for the 2018-2019 school year is more than $35,000 at private colleges and either $9,700 or $21,600 at public colleges depending on whether you are an in-state or out-of-state student. Multiply that by four years and you could potentially be spending more than six figures per child on tuition alone. Keep in mind these figures do not account for room and board, textbooks, personal expenses and other associated costs.
There are many choices we have, as parents, in helping ease the load of our children’s college tuition. Below are some of the options to help you prepare for the upcoming tuition costs:
Income – This is the most straightforward option wherein the payor uses after tax dollars to pay for the child’s education expenses. For those with children who plan to go to college here in California, the income needed to cover these costs is amongst the highest in the country due to the higher cost of living.
Many colleges have payment plans so that you are not shelling out large sums of money each semester or quarter. Weigh the extra fees associated with these payment plans against any potential interest you would earn by having your money invested elsewhere for a longer period of time.
Loans – There are many options when it comes to obtaining a loan to pay for college including need-based, non-need-based, state loans and private loans. Each has its own set of pros and cons and the best loan for you might not make the most sense for the next family.
On one hand, when students have a financial obligation tied to their education they may take their college experience more seriously. On the other hand, interest can be quite high, causing already expensive college costs to be that much more difficult to repay. Loans sponsored by the government offer fixed interest rates which are often lower than private options.
These days, loans are a hot topic as student loan debt is now second highest amongst consumer debt categories. The average student borrower has more than $37,000 in debt upon graduation, which is $20,000 more than just 13 years ago. One way for a student to offset the costs of repaying their loan is by having a parent or family member pay the interest.
529 Plans – A 529 plan is a tax-advantaged investment account designed specifically to pay for future education costs. The plan offers both tax-free earnings and tax-free withdrawals for funds used for qualifying education expenses.
There are two types of 529 plans: prepaid tuition and education savings. Every state offers at least one of these types of plans. The former allows you to buy credits at participating colleges whereas the latter allows you to open an investment account dedicated simply to saving for qualifying college expenses.
Make sure to note your individual home state tax consequences as they differ on a state-to-state basis. There may be taxes and penalties if the money is used for expenses other than educational.
Financial Aid – Financial aid assistance is made available to students based on mean testing. Before entering the child’s freshman year of college, all students should apply for financial aid. Even if you do not qualify, this will be mandatory for most universities to offer additional scholarships of this type.
Scholarships – There are literally hundreds of scholarships available at each university, which can range from hundreds to thousands of dollars. Each department may offer them and it is up to the student to hunt these down. Personally, in my case, our sons were able to find scholarships of up to $1,000 just by researching them and applying. In their case, they had to write short essays explaining the reason they deserved the scholarship.
Investment Accounts – Parents also have the option of starting an investment account for the purpose of education, separate from a 529 plan. The catch here is that money made would be taxed as all investment accounts using capital gains or income tax. On the flip side, however, you are not subject to qualifiers for how this money is spent.
Work During School – There are several approaches for working while attending school simultaneously. For one, you can work during the summers saving all money earned to put towards your education. Alternatively if you are working full-time and attending college part-time you may qualify for tuition reimbursement through your job.
Students may also decide to take advantage of the federal work-study programs, which provide part-time jobs for students, enabling them to pay for their education. In addition to the obvious benefit of income work-study, jobs also provide great work experience for students, preparing them for their post-college careers. Because work-study is a government program, eligibility is dependent upon financial needs.
Trost Financial is available to help plan all of life’s big expenses including college tuition. Contact your financial advisor to put the pieces in place for your children.
