Guide to Paying for College

When your student sets off for school, you want to ensure you can help them. Our guide to paying for college offers you a variety of ways the entire family can work together to make a dream a reality

Guide to Paying for College University Student on Campus.

What You Need to Know

According to recent reports, a four-year private university is expected to cost over $303,000 by 2036, and public colleges could reach $184,000 – nearly double what it costs now.  With prices like that, how do you help pay for a loved one’s college without compromising your other financial goals?  Our guide to paying for college outlines ten types of tax-advantaged and traditional methods worth considering.

What’s Covered?

To help you understand the options, we’ve developed this guide to paying for college so you can easily understand the different options, pros, and cons.  Topics covered in this guide include:

      • 529 Plans
      • Coverdell
      • Prepaid plans
      • Cash-value life insurance
      • Gifting
  • Savings bonds
  • Scholarships & grants
  • Borrow money
  • Negotiating tactics
  • School selection

Qualified Tuition Plans

There are two types of qualified tuition plans. They consist of college savings and prepaid tuition.  Every state has at least one 529 savings plan, but some states may offer more than one plan.  In addition, you are not limited to only the plans offered in your state.  Most state plans are open to non-residents so it’s worth shopping around.

529 Plans

With college savings plans, you establish an account for your student which can be used to pay qualifying educational expenses such as tuition and room and board. These plans allow you to invest in things like mutual funds, money market funds, and fixed investments to help grow your money. What’s more, your contributions grow tax-deferred, and earnings are taxed at the beneficiary’s rate, which is often considerably lower than the parent’s rate.

Because 529 plans enable funds to accrue over time, they are beneficial if started when the student is young. Even before your child is born, you can establish a 529 plan in one of your names and then transfer it after the child is born. But don’t overlook these beneficial plans as an option, even if you don’t start saving until your child is older or nearing college age. One good way to help fund a 529 Plan is to ask family members to make deposits instead of gifts.

Funds for these plans must be used for qualifying educational expenses or there are penalties. Plus, there may be market risks, fees and expenses involved. In the past, family contributions to 529 plans impacted a student’s eligibility to qualify for need-based financial aid, but that has changed. As a result of the Consolidated Appropriations Act of 2021, students will no longer be required to disclose cash support on FAFSA forms for the 2023-24 academic year.

Coverdell Education Savings Account

As a long-term investment option, contributors may make after-tax contributions up to $2,000 per year until the child’s 18th birthday. Coverdell accounts grow tax-deferred, and distributions may be taken tax-free provided funds are used for qualifying educational expenses like tuition, room and board, computers, books and supplies, tutoring, and transportation. Contributors have a high level of flexibility with their investment choices which can also be used to fund elementary, middle, and high school educational costs.

Though there are income limits and funds must be used by the time the student turns 30-years-old, they can be rolled over to another individual who is related to the original beneficiary provided they are under 30 years of age. This includes immediate family members, parents, cousins, aunts, uncles, and even in-laws.

Several States Offer Plans

Currently, nine states offer prepaid tuition plans and are open to new enrollment:

Florida
Michigan
Pennsylvania
Mississippi
Maryland
Texas
Massachusetts
Nevada
Washington

 

Most of these state programs are backed by the full faith and credit within each plan’s home state, which means the government will provide funding should there be a major financial or economic crisis.

Most states require participation for at least three years before the money can be used and you can’t use your account to pay for certain expenses, including room and board. These plans do vary in terms of their guarantees, residency requirements, and other details so do spend some time thoroughly checking out each plan’s options.

 

Additional Options

Paying for college with students holding piggy banks

Cash-Value Life Insurance

As a tool to help pay for college, this asset does not count toward the expected family contribution used as part of financial aid consideration. Money grows tax-deferred, and distributions are generally tax-free provided the life insurance policy remains in force. What’s more, life insurance policies may continue to grow even after some withdrawals are taken from them.

Gifting

If grandparents, aunts, uncles, or other family members wish to help pay for tuition, the IRS currently allows payments to be made directly to the student’s school without counting as a gift to the student.

You might consider if the college offers any discount for prepayment of multiple years. This practice could yield significant savings, especially since tuition rates often increase each year.

Traditional Methods of Paying for College

Paying for College with students standing shoulder to shoulder.

Bonds

Interest from Series EE and Series I savings bonds may be excluded from your taxable income, provided the funds were used for qualified educational expenses or contributed to a 529 plan during the year they were redeemed.

Scholarships and Grants

Scholarships – Have students start building their scholarship portfolio at an early age, by joining organizations that offer scholarships, volunteering after school, and maintaining high grades. Though searching for scholarships can be time-intensive, the benefits of locating these funds can be well worth the effort. You can start by searching online for scholarships that meet your student’s profile.

Federal and State Grants – The federal government provides grants for students attending college or career school. Most types of grants, unlike loans, are sources of free money that generally do not have to be repaid. These grants can come from the federal government, your state government, your college or career school, or a private or nonprofit organization. It’s worth noting that in certain scenarios, your student may be required to return a portion or all of the grant funds. For example, if they withdraw from school before finishing an enrollment period. Do your research, apply for any grants you might be eligible for, and be sure to meet application deadlines.

Borrowing 

When considering the health of a parent’s retirement versus paying for your child’s college, a good rule of thumb is to remember that while you can borrow to pay for college, you cannot borrow to pay for retirement. As part of a financial aid package offered by schools, students may have access to subsidized and unsubsidized loans and parents may have access to unsubsidized loans. Though your student may not need to begin repayment for six months after they graduate, it might be a good idea to make payments while they are attending, to help lower the overall amount of interest paid on these loans.

Negotiating 

Financial Aid Package – To help determine what sort of financial aid package your student might receive students should fill out a Free Application for Federal Student Aid (FAFSA). Colleges use results for determining needs-based financial aid each year. Some colleges may be willing to adjust packages to entice students to enroll. Also, students can attempt to negotiate needs- and merit-based financial aid directly with their school’s financial aid department.

Write a Letter – Your student can write a letter that discusses why they are a good fit for the university and detail comparisons with scholarship offers received from comparable colleges. Keep in mind that eligibility is based upon assets held in the student’s name, such as a trust or tuition paid by others as a gift, which could negatively impact the student’s ability to get need-based financial aid. You should check with your financial advisor to help you determine the best solution for your situation.

Selection of College 

Though a delicate matter, sometimes reconsidering college choice is a good compromise. Consider public universities or a combination of public and private colleges to help offset costs. By reconsidering which college to attend your student might find a more affordable solution.

Seek Professional Help

When your student sets off for college, you want to ensure you can help them in the event of a financial emergency. That’s why it is best to seek the advice of a financial advisor on the additional tools you should have in place. Not only can they help you sort through the best option or combination of options to pay for college, but they can also help you keep your current financial goals on track.

We all know there is a lot of misinformation on the web.  That’s why, as part of our GWA Gives© program, we are dedicated to helping people find sound advice.  We believe in sharing free material so you have a trusted source to rely upon. We are always happy to answer any questions on paying for college that you might have.  You can reach us at one of our convenient offices listed on the Contact Us page or by filling out the chat form below.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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