Saving for Your Child’s College Education

Perhaps the most dreaded aspect of getting a college education is the cost. This is understandable given the enormity of the student debt crisis in the United States. Over 44 million borrowers owe a total of $1.5 trillion in student loans, leading some political leaders to propose sweeping changes that cancel all student debt and make public colleges tuition-free.

According to the College Board, the average annual cost of in-state tuition at a public four-year college reached over $10,200 in 2019. The average student debt reached $28,650, according to the Institute for College Access and Success.

For many families, college costs don’t end with tuition; room and board can come with its own hefty price tag. The College Board reports that in the 2018-19 school year, average room and board ranged from $3,500 for public, in-district two-year schools to $34,700 for private, nonprofit four-year institutions. The exact cost will depend on the student’s living situation (e.g., residence hall vs. off-campus housing) and the cost of living where the school is located.

As costs increase, parents have become more realistic about how much of their children’s education they’re able to cover. According to a 2018 Fidelity College Savings Indicator survey, only 49% of parents feel it is their responsibility to pay their child’s college tuition in full, down from 56% in 2016.

Parents who do decide to help financially will likely find themselves asking questions about the best ways to contribute, such as: “When should I start saving?” “How much should I save?” and “Should I take out a loan?” In this section, we’ll try to answer some of these questions and provide effective saving strategies for college.

Despite the widespread tendency to put off savings, most financial experts agree that saving earlier is better. Jill Rayner, director of financial and veteran aid at the University of North Georgia, recommends a savings account that the whole family can contribute to: “Each month I automatically have a payroll deduction made into each account. I also put extra funds in their college savings account for their birthday and for special holidays.”

Even if you can’t put aside money right now, you should start by determining the projected cost of your child’s education. One easy way to do this is to check college websites, which usually have pages detailing the cost of attendance.

If you are in the early stages of planning and are unsure how to estimate costs, factors to consider include the length of time before your child starts college, whether prospective schools are two- or four-year institutions, and whether colleges are in-state or out-of-state. Another variable to take into account is that costs increase year to year, so tuition for 2020 is likely to be slightly higher than tuition in 2019.

Below, Rayner outlines some academic and financial steps that can be taken while your child is still in high school. Rayner has worked in financial aid for over 25 years and wants every student to graduate college with as little debt as possible.

In addition, Rayner points out that many states offer college savings plans for parents to save for educational expenses. Check with your state’s education department to determine the types of benefits available, how to start an account, and how to use the account to pay for college expenses once your child is enrolled.

If you have started a college savings fund, you deserve some credit. Giving your kids a leg up today can pay dividends in the future, alleviating student stressors such as working full time while in school or choosing careers that offset the cost of college. This may give you and your child peace of mind even if it creates financial stress in the short term.

There are many ways to save money for a college education. Our College Prep Survey aimed to determine the types of savings funds preferred by parents. Responses revealed that the following strategies are most common:

Below, you can find a breakdown of some of these savings plans explaining how they work and the pros and cons of each.

A 529 account was the most popular college savings plan among our survey respondents, and experts agree this is a solid choice. “I find that parents feel most comfortable with 529 plans,” said Ann Brookes, an LL.M. tax attorney who addresses tax matters for families and small businesses. In an interview with BestColleges, Brookes explained there are many advantages to 529 plans:

“529 plans offer flexibility and control for parents or others creating them. While the money needs to be used for qualifying educational expenses, the allowable uses are many. They include tuition and fees; books, supplies, and equipment; computers, printers, software, and internet access; and, for students who are at least half time, room and board. In addition, the Tax Cuts and Jobs Act expanded qualifying education expenses to include up to $10,000 per year per beneficiary for K-12 public, private, or religious education.”

To maximize savings, parents can also shop around for 529 plans across state lines since many do not have residency requirements. Of course, the main advantages of a 529 plan are the tax benefits. “Money deposited grows tax-free, and no tax is due when distributed if used for these purposes,” Brookes said. She added that, “there is a 10% penalty for withdrawal of funds that is not for qualifying purposes.” However, if a student receives a scholarship, a matching amount can be withdrawn from the account without penalty.

Unlike other savings plans, such as UTMA or UGMA accounts, 529 plans allow parents to control the funds and even change the beneficiaries. Brookes clarified what this means in practice: “The person creating the account can change the beneficiary without penalty or tax … [and] has control over the account and its funds until they are withdrawn. For families with several children, the tuition amounts may vary, and a 529 plan allows the flexibility to change the beneficiary, thereby accommodating this.”

While 529 plans work for most needs, some parents may prefer UTMA or UGMA accounts. According to Brookes, the reason for using one of these accounts tends to be one of the following:

Brookes had some helpful advice for parents deciding between savings strategies: “The choice of investment vehicle to save for college requires considering the pros and cons of each compared to what families want to accomplish and avoid. Sometimes, maintaining control over the account is paramount. This means parents can consider the needs of more than one child as they reach college age. Sometimes, maintaining control over the investments drives the decision. Other times, it is the ease of tax reporting that parents prefer. I often suggest that people consider what their goals are and what they want to avoid the most. Usually the netting of these will reveal the choice that fits their goals.”

Aside from paying no taxes on distributions (and some earnings) from college savings accounts, parents can benefit from separate tax credits and deductions related to higher education expenses. An education credit can help lower the cost of higher education by reducing the amount of taxes owed on your return. There are two types of federal education credits:

To qualify for these credits, you or your dependent must be enrolled at an eligible educational institution and paying for qualified education expenses. If you are eligible for both education credits in a given year, you can claim only one on your tax return.

Depending on your taxable income and the amount of the standard tax deduction for the year, you may or may not want to file for itemized deductions on your tax return. For expenses related to higher education, however, there are several deductions for which you might qualify, including deductions in the following categories:

For more information on education credits, deductions, savings plans, and other educational assistance benefits, visit the Internal Revenue Service (IRS) website.

For many parents, contributing to a college savings fund may not be an option. A majority of parent-respondents in our survey (60%) said that they did not have a college fund set aside for their child. When asked about the greatest roadblocks to contributing to a college savings fund, the main reasons cited included the following:

While having cash in hand is the best way to pay for college, students and parents without significant resources can still take advantage of other financing options, including loans. Keep reading to learn about funding higher education without a college savings account.

Regardless of whether you intend to help your children financially with college, they should submit the Free Application for Federal Student Aid (FAFSA). The FAFSA determines a student’s eligibility for any kind of federal financial aid, including federal loans, grants, scholarships, and work-study awards. Note that the FAFSA must be submitted for every year the student needs federal financial aid.

When completing the FAFSA, applicants must report their parents’ income if they are dependent students. Federal aid depends on the assumption that a child and their family are responsible for paying for college, even if parents don’t share in this assumption. A family’s financial strength and a student’s dependent status determine whether they qualify for federal student aid. Below are some rough guidelines for determining your dependent status, but be sure to consult the Student Federal Aid website for more detailed information.

To learn more about how to qualify for federal student aid, take a look at the BestColleges guide to understanding the FAFSA.

When filling out the FAFSA, applicants will be asked to report some basic information about their parents. This information includes their parents’ identities (e.g., names, dates of birth, and Social Security numbers if applicable), living situations (e.g., states of residence, household size, and marital status), and financials (e.g., assets and tax information).

While parents are asked to provide financial information on the FAFSA, this does not imply an actual financial responsibility for a student’s education. However, you may choose to help manage the multiple funding sources your child garners from the FAFSA, including loans and scholarships that begin and end at different times during the student’s academic program. Of course, students themselves should be fully engaged in the financial aid process and should work with financial aid advisors at their school to ensure they’re meeting certain deadlines and requirements.

If you are not a citizen of the United States and are unsure what information to provide on the FAFSA, take a look at the U.S. Department of Education’s advice for noncitizen parents. Note that the FAFSA does not ask you about your citizenship status and that your status will not affect your child’s ability to secure federal financial aid.

Schools depend on the FAFSA to determine a student’s financial need. The most crucial piece of information financial aid officers use from the FAFSA is the expected family contribution (EFC). The EFC is calculated using your family’s taxed and untaxed income, assets, and benefits (such as Social Security or unemployment). By subtracting the EFC from the cost of attendance (COA), schools can determine your child’s financial need.

Note that the EFC does not indicate how much money a student’s parents are actually going to pay for college; it is used only to calculate a student’s eligibility for need-based financial aid. It’s also important to note that the COA includes costs such as tuition and fees, room and board, and books and supplies.

If in doubt, consult the Federal Student Aid website, which will guide you through the FAFSA process.

Editor’s Note: This article contains general information and is not intended to be a substitute for professional advice. Please consult a professional advisor before making decisions about financial issues.