No matter which college your child chooses, higher education comes with a price tag. The average annual tuition at a four-year college ranges from around $10,000 for an in-state public school to about $36,000 for a private institution.1 It’s never too early — or too late, for that matter — to start strategically saving for your child’s education. Here are four things to consider to help offset the cost of college and ensure that your long-term financial goals stay on track.
Scholarships and grants can go a long way towards reducing the tuition burden for parents. The secret is to begin this process sooner than you think. Help your child search and apply for scholarships as early as their freshman year of high school so they can get a head start.2
Another tip is to look for local or niche scholarships.3 These are often very specific (for students from a particular state or town, or of a specific ethnicity, for instance). There are several websites that allow you to browse through scholarship resources by state, race, gender and much more. If you can find one your child qualifies for, they’re usually much less competitive than national scholarships.
As for grants, there are so many different kinds: need- and merit-based, state-sponsored and more. Help your child start their search based on their academic interests and consult their guidance counselor for help determining what grants they might qualify for.
One great way to save for college is by opening a 529 college savings plan account, specifically set up to help you save and invest money for educational expenses. A 529 has a lot of advantages, one being that family members and friends can contribute to this account at any time4 – it’s a great suggestion for when people need birthday present ideas. Money in a 529 plan, used for educational purposes, is exempt from federal taxes.5 Many states also offer a full or partial tax deductions or credit for your contributions.
Another option is a Coverdell Education Savings Account, which allows you to put away up to $2,000 per year for children 18 or younger subject to IRS eligibility limits.6 This money can be withdrawn without being taxed and can be used for education expenses outside of college, such as private school tuition. An added bonus here: these accounts can be transferred to a relative of the recipient under 307 without triggering tax or penalty.
Finally, you might consider opening a Roth IRA for your child as well. Traditionally, these are used for retirement planning, but among their pros are that you can withdraw the money you’ve contributed with no penalties8, whenever you choose.9 Unlike 529 plans, funds in a Roth IRA are not restricted to qualified educational expenses, which gives you more flexibility. You could even store some college savings in your own Roth IRA account — that way, if you end up not needing it for your child or having some left over, you can redirect the money towards retirement.10
Tuition at a private college can cost over two-thirds more than at an in-state public college11, so considering a local option is a no-brainer. Fewer students at public universities take out loans than those at private colleges12, meaning they graduate with less debt.
Another tip to consider: Some programs allow out-of-state residents to actually pay in-state tuition if they’re from the same region.13 In addition, others make exceptions and waive residency requirements for kids with parents who are police officers, teachers or military service members.14
As college tuition is typically calculated per year, graduating early can translate to serious savings. Dual enrollment allows students to take classes for high school and college credit at the same time.15 Similarly, students who earn a 4 or 5 on AP exams, and in some cases even a 3, can earn college credit automatically.16 Taking this approach could mean cutting the time spent in college in half, or at least down to three years rather than four, enabling you to save big-time on tuition and fees.17
While paying for college can feel like a sizeable undertaking, there are many tools and strategies that help make it achievable. With some research and careful planning, you can give your kids a great college experience while safeguarding your long-term financial health.
For further tips and guidance about developing an educational savings plan, be sure to speak to one of our expert financial advisors.
This material does not constitute tax, legal, or accounting advice, is for informational purposes only and is not meant as investment advice. Please consult your tax or financial advisor before making any investment decisions.
1 U.S. News: “How to Make College Cheaper” by Farran Powell and Emma Kerr, September 2, 2020 https://www.usnews.com/education/best-colleges/paying-for-college/slideshows/10-strategic-ways-to-pay-less-for-college
2 U.S. News: “How to Find and Secure Scholarships for College" by Farran Powell and Emma Kerr, February 5, 2020 https://www.usnews.com/education/best-colleges/paying-for-college/articles/how-to-find-and-secure-scholarships-for-college
3 U.S. News: “Find Local Scholarships in Your Own Backyard” by Emma Kerr, March 30, 2020 https://www.usnews.com/education/blogs/the-scholarship-coach/2011/01/27/find-scholarships-in-your-own-backyard
4 Student Loan Hero: “5 Alternatives to 529 Plans That Still Accelerate Your College Savings” by Kali Hawlk, December 4, 2020 https://studentloanhero.com/featured/3-ways-save-college-not-529-plan/
5 The Wall Street Journal: "How to Start a 529 College Savings Plan” by Mary Pilon, December 16, 2008 https://guides.wsj.com/personal-finance/saving-for-college/how-to-start-a-529-college-savings-plan/
6 There are IRS limits to who may contribute to a Coverdell ESA. Eligibility is based on single or joint filers modified adjusted gross income (MAGI)
7, 10 The New York Times: “How to Save for College” by Tara Siegel Bernard https://www.nytimes.com/guides/business/how-to-save-for-college
8 NerdWallet: “529 Plan vs. Roth IRA? The Roth Wins, Mostly” by Andrea Coombes, April 12, 2021 https://www.nerdwallet.com/blog/investing/529-plan-vs-roth-ira-roth-wins-mostly/
9 Note: This applies only to money you’ve contributed as opposed to the earnings in your account, which you would likely have to pay taxes and penalties on.
11, 12 U.S. News: “The Cost of Private vs. Public Colleges” by Emma Kerr, June 25, 2019 https://www.usnews.com/education/best-colleges/paying-for-college/articles/2019-06-25/the-cost-of-private-vs-public-colleges
13 Best College Reviews: “How to Get Out Of College Debt Free” by Staff Writers, November 6, 2020 https://www.bestcollegereviews.org/features/how-to-get-out-of-college-debt-free/
14 Business Insider: “How to get in-state tuition at out-of-state colleges” by Kelsey Sheehy, July 18, 2017 https://www.businessinsider.com/how-to-get-in-state-tuition-at-out-of-state-colleges-2017-7
15 CNBC: “Here’s how parents can cut their kids’ college costs” by Kayla LaRosa, July 28, 2019 https://www.cnbc.com/2019/07/26/dual-enrollment-programs-can-get-students-out-of-college-faster.html
16 U.S. News: “Use AP Credits to Graduate From College in 3 Years” by Farran Powell, May 9, 2018 https://www.usnews.com/education/best-colleges/paying-for-college/articles/2018-05-09/use-ap-credits-to-graduate-from-college-in-3-years
17 NerdWallet: “College Savings Hacks”, 2017 https://www.nerdwallet.com/blog/loans/college-saving-hacks-2017/