Understanding what makes education affordable

“How can I make sure my kids can afford to go to college?” A college degree has never been more important. Today, many jobs that pay a living wage require at least a bachelor’s degree. 

If you’ve got children or are planning a family, you may wonder how you can ever pay for college. The key is starting early, staying disciplined and employing tax-advantaged savings vehicles to help maximize your accumulation  potential. Your financial professional can help you get started on developing a plan. Together, you can take these steps:

Understand the costs

Even in-state tuition, room and board at the average four-year public college now costs an average of $26,820.

College costs have historically risen faster than inflation, which means that future costs will be even higher in today’s dollars. For instance, by 2038 when today’s newborns matriculate as freshman, four years of in-state college expenses are expected to rise to $278,199¹. Four-years of out-of-state public college will cost an estimated $448,996 and four years of private school will come to $569,261 by 2038².

Estimate financial aid

That’s a lot of money, especially if you have several children. But fortunately, you may not have to pay for all of it. Many college students receive at least some financial aid. Financial aid can come as a grant, which doesn’t have to be paid back, or as a loan, which does.

Much of it is need-based, so the more money you make, the less you’ll generally be eligible to receive in aid. However, many colleges also offer merit-based aid, based on SAT scores, grades and other academic criteria. Some institutions also offer scholarships to students who excel at sports, music or the performing arts.

The College Board³ reports that in the 2020-21 school year, undergraduates received an average of $14,800 in financial aid, including $10,050 in grants, $3,780 in federal loans, $880 in education tax credits and $90 in Federal Work Study. Many colleges have net price calculators on their websites, where you can enter your income, savings, grades, test scores and other information to receive an estimate of how much you’ll pay after financial aid.

Plan for the rest

Students often don’t get enough financial aid to cover the full cost of college, and their families have to pay for the rest out of income or savings. Interestingly, the financial aid formulas weight income much more heavily than savings. The more you can accumulate  before your children start applying for college, the better off you may be.

Your financial professional can help you decide between a number of effective ways to save for college, including:

529 plans

A 529 plan⁴ is an investment account that you fund with after-tax income—that is, you can’t deduct your contributions from your taxable income—but which grows tax-free until you begin withdrawing money. Then, if you use the money for qualified educational expenses like tuition, room, board and books, you pay no taxes at all on the growth in your investments. In some cases, you could get a break on state taxes as well, but ask your financial professional about the details.

529 plans are flexible. You can use them for high school or college. You can change the beneficiary of an account, for example, if one child gets a full-ride scholarship and doesn’t need the money. There’s usually a limit on how much you can contribute, but these are generous, ranging from $250,000 to over $500,000.

There are many different 529 plans on the market, so ask your financial professional for more information to consider.

Coverdell Education Savings Accounts

Coverdell education savings accounts are also tax-advantaged vehicles for college savings, but they’re much more limited than 529 plans. For instance, you can invest only $2,000 per year per account in a Coverdell. Beneficiaries must be 18 or younger when you establish the account, and if the assets aren’t used up by the time they’re 30, penalties will be assessed against withdrawals.

Ordinary savings or investment accounts

You can also save for college in ordinary bank or brokerage accounts, although there are no tax advantages associated with these accounts.

Start early

Regardless of how you choose to save for college, it’s important to start as soon as you can. If you start when your child is born, even a relatively modest monthly investment can grow to cover a substantial portion of your costs. But if you wait until your child is in school or even in high school, it will be much harder to accumulate the assets you need. Talk to your financial professional about your goals, circumstances, time horizon, and tolerance for risk and how to get started. The sooner the better.