You may have just found out you’re pregnant — or the college catalogs are beginning to accumulate on your dining room table. Or perhaps your family is somewhere in the middle, with your children out of diapers but not yet into calculus.
Wherever your family falls in the age spectrum, one thing is certain: Either in your immediate family or in your extended one, some people will want to continue their educations beyond that once- adequate but now insufficient stopping point of high school graduation.
And therein lies a problem: Although your child can receive a primary and secondary education without incurring any added expense in your budget (unless you take into consideration all those fund-raisers and extracurricular activities), post-secondary education of any type isn’t free. You must pay for the privilege of having your child attend college or university.
If you’ve already explored the costs of post-secondary education, you know that the numbers being discussed are large; if you haven’t yet experienced the pleasure, rest assured that the amounts in question will likely take your breath away. In solving any problem, you need to remain calm and focused on the task at hand.
This article helps you do just that — by making you methodically look at your lack of college savings, helping you leave your misconceptions about saving at the door, and showing you ways to actually begin saving.
When you convince yourself that you’re able to save something and actually begin to put away some money, you’ve won a major victory; everything that follows will be easier. Just keep in mind that saving now will create opportunities and open doors for your children in the future.
1. Checking Out the Cost of College
Whether or not you went to college (and regardless of who paid for your education, if you did), the joy of planning and saving for that event for your children, your grandchildren, or even yourself and your spouse has to be tempered somewhat by the uncertainty of the financial costs involved.
That uncertainty is the exact amount of the eventual bill because, clearly, the cost is going up, up, up, and never down. How can you possibly know how much to save if you can’t figure out how much college will cost?
This section breaks down all the costs of education into their component pieces and compares different types of education. If you know that your prospective student plans to attend a prestigious medical school at the end of the rainbow, you need to plan accordingly.
If, however, your budding student has a fascination with all things dead and tries to embalm the family pet before burial, you may be looking at a funeral services school, which certainly costs much less than medical school.
The point is that you need to be realistic about your expectations and about the talents and desires of the prospective student before you jump into your savings program. You want to save enough, but saving far more than you need for college is pointless.
Because tuition is usually the largest cost for college, many people make the mistake of saving only for tuition. But other costs, such as housing, books, and supplies, can account for a large chunk of college expenses — a large enough chunk that you should include those costs in your savings plan.
Although this section covers the major costs of college, they aren’t the only costs you may encounter when sending your child to college. We don’t suggest that you start saving for a beer fund, but be prepared to pay for parking permits, transportation, health insurance, movie tickets, and jeans.
Tuition refers to probably the largest cost for college: the fees for actual instruction. For the academic year 2007-2008, in some instances, the tuition costs for a state university exceeded $10,000 for an in-state student and more than $21,000 for an out-of-state student — and many private four-year universities charged more than $31,000 for tuition alone!
If you’re planning for a baby about to be born, who won’t matriculate until 2026, and if tuition continues to increase at a rate of approximately 5 percent each year (which is what has been happening lately in the private universities), that annual tuition fee could increase to a whopping $24,066 for an in-state student at a public university, $50,539 for an out-of-state student at a public university, or $74,605 for a student at a private university — or more than $103,000, $217,000, or $321,000, respectively, for four years. If your baby thinks carrying a briefcase is cool or asks for the professional doctor kit by age 2, tack on several extra years for graduate or professional school.
These numbers may seem insurmountable, especially if you’re entering the savings game fairly late; however, some relief may be available. Only a small percentage of students and families actually pay the top-dollar price. Not all universities charge in that price range; many offer huge amounts of outright grants and other forms of financial aid (other than loans, although loans are available to all), and scholarships and grants from other sources may be available. Be sure to look into these possibilities at any school you are considering.
If you’re fairly certain that your child will attend a public college, you may want to begin investigating whether your state offers a Section 529 prepaid tuition plan to help you pay for those upcoming tuition bills. Even if you aren’t able to save for tuition costs in one of these plans, saving money in any Section 529 plan or Coverdell Education Savings Account will allow your college savings to grow faster than conventional savings accounts.
Accounting for housing
You may come from a family that assumes that everyone going on to higher learning will receive their post-secondary education at the local campuses, and you fully expect that, when your student reaches that point, he or she will be living at home. If so, you can probably skip this part, although you should be stashing away some money for good, reliable transportation, whether that means a car or bus, or subway fare.
On the other hand, if you suspect that your student won’t be satisfied going to the local schools (or if your area doesn’t really have many post-secondary offerings), you need to add the cost of housing into your savings plan — either college-owned housing or local rental real estate.
Most colleges provide some sort of room and board options in the form of on-campus or university-owned housing, and they gladly tack those fees onto the tuition bill. Because most university-owned housing is mandatory for all non-commuting students for at least the first year or two, these costs must factor into your savings plan. As of 2022, the average cost of room and board for a public four-year university is $11,140 and $12,680 for a private university. Differences in costs depend on a few factors, such as the following:
- Location: Generally, city schools have higher housing costs.
- Size: Generally, larger colleges tend to have higher housing costs than smaller colleges.
- The number of students in a room: If your child insists on having a room to herself, expect to pay a premium for that privilege. Generally, the more students crammed into a single room translates into less money you’ll have to pay for your student.
You can use tax-free distributions from your Section 529 and/or Coverdell plans for room and board charges paid directly to an eligible school (the school can tell you whether it’s eligible).
Local rental properties
Although colleges and universities try to expand their student populations, many fail to increase their own housing to meet the increased number of students. This on-campus housing shortage pushes more students into the local housing market. In areas where rental units are being added, an on-campus shortage isn’t a problem; the rental units increase at a rate equal (hopefully) to the number of students seeking housing.
However, many older cities have very limited rental housing, and the increased number of students seeking it has forced prices up sharply. So if you plan to rent an apartment or house for your student, costs become more variable, making it more difficult for you to predict how much you may need to save for your student’s housing needs.
If you live close to the college your child attends, the easiest way to check local rental costs is to read the classified ads and haunt the rental board in the college’s housing office. If you’re living farther away from the action, use the Internet. Many newspapers, both big and small, have Web sites that almost always include classified ads.
The cost of a rental may not include utilities (heat in the northern states and air conditioning in the southern states can be very expensive), and it certainly doesn’t include food. You need to add the cost of any utilities not included, plus money for either food or a meal ticket at the university, to accurately compare your costs to the university’s room and board plan.
Check the amount of room and board that the college considers to be a “qualified education expense.” (You can often find this information buried on its Web site, or you can phone one of the college’s financial aid officers.)
You can use tax-free distributions from your Section 529 and Coverdell plans to pay rent to a nonuniversity landlord; however, if you spend more than the college’s estimated amount of room and board on a nonuniversity landlord, you may want to pay the excess some other way. Distributions taken from your Section 529 and Coverdell plans in excess of “qualified expenses” are subject to tax and a 10 percent penalty.
Factoring in books and supplies
Okay, so maybe you know you’ve enough saved for tuition and room and board, but the need for money doesn’t stop after you unload the SUV on the first day of orientation. When your student is at school, he needs to buy books and other supplies, and he won’t know which books and supplies he needs until after the first few days of school.
The costs for books and supplies are substantial. Figure on putting aside at least an additional $1,000 per year for books, plus $500 to $1,000 for other supplies, such as lab coats, protective glasses, notebooks, or even pens and pencils. In comparison to the tuition and room and board fees, this amount may not seem huge, but it’s still substantial. Over the course of four years, that bill can be anywhere from $6,000 to $8,000. A laptop computer? Add another $750.
Unlike tuition costs, which are set by the university, and housing and food costs, which are set either by the university or by the conditions in the local economy, you can somewhat control how much your student spends on books and supplies.
Your student can purchase most books used and then resell them when he’s finished with them. Supplies, such as notebooks, don’t need to have the university or college crest on them to function properly, and using the computer lab sure is cheaper than buying a computer.
Provided that the books and supplies your student purchases are required by the college, you can pay for these supplies using tax-free or tax-deferred distributions from either a 529 plan or a Coverdell account.
Ignore this category at your peril. Saving enough money to send your student to the school of her choice is pointless if you then leave her in the lurch, without the tools to completely access the education being offered.
2. Doing the Numbers
Until now, crunching the numbers and figuring out what you think college will cost was usually where you could expect to begin and end your exploration of how to pay for future educational costs. But after you resolve to start saving and you create a plan to save for the projected costs, it’s time to take this exercise a bit more seriously.
Figuring up the costs
Depending on the size of your family and your expectations, adding up the cost of a college education can be a fairly straightforward calculation, or it may become quite involved. Be realistic, both about the capabilities and ambitions of your future student and your ability to pay.
Your straight-A daughter may have to scale back her MIT dreams if your budget, including amounts that you can add from your current earnings, goes only as far as your local state college (although not necessarily — she may want to apply for scholarship aid).
Likewise, saving for an Ivy League education is pointless if your child has plans to open his own auto repair shop. And clearly, the more children you’re sending to college, the thinner your resources may be stretched per child.
No matter how late you begin to save for future college costs, the entire weight of the enterprise doesn’t necessarily need to rest solely on your shoulders, nor do you need to begin to save for college from nothing.
Too many people equate saving for the future with current deprivation. For most people, living expenses currently equal, or even exceed income, and they may not have money left in the family budget for saving. Clearly, if you fit into this category, you won’t be able to save unless you make some changes in your life. Learn more about the best ways to save money at home.
3. Exploring Section 529 Plans
Saving money is a good thing, or so the federal government would have you believe. Uncle Sam is prepared to back up that philosophy with a variety of savings programs that contain built-in tax incentives, some of which you may already be using, such as a 401(k) or IRA.
One of the newer types of incentive savings plan is the Qualified Tuition Program, or Section 529 plan, which is designed solely for the purpose of saving for college or any other type of qualified post-secondary education. As with almost everything else the government cooks up, though, Section 529 plans aren’t simple to navigate.
Following the rules
Section 529 of the Internal Revenue Code is long, complex, and not for the faint of heart. Yet savings accounts that fall under its regulations can be a fantastic way to save for future educational expenses.
To make this plan work, you have to understand the requirements; setting up one of these accounts is pointless if you don’t cross your t’s and dot your i’s just like the IRS wants. Remember, the IRS doesn’t have a category of “close, but no cigar.” Either your account will qualify under the regulations for tax exemptions, or it won’t. And if it doesn’t, the consequences may be costly.
Making your money work for you
Creating a successful savings plan involves more than following the rules, although compliance is a big part. You’re a big factor in determining whether your savings program flies or falls. Your understanding of the various ways your savings may earn money and of the different investment options available to you is important in creating the substantial amount of savings you’ll need to see your children through college.
Choosing the best options
Even when you understand the rules, manage to regularly save major portions of your income, and discover how to manipulate the investment choices to your best advantage, events in your life may require you to make sudden changes in your Section 529 plan savings accounts. Life happens, whether you’re prepared or not, and often the last thing you want to think about when it does is the effect on your investments.
4. Checking Out Coverdell Accounts
If the world of tax-exempt savings accounts were an ice cream parlor, Coverdell Education Savings Accounts (ESAs) would be a new and improved flavor — still not everyone’s favorite, but just what you may want on a particular day. And, not surprisingly, when shopping for a way to save money for college, many people prefer
Coverdell accounts, whether for their wider range of investment options, the account owner’s increased level of control over the account, or the fact that certain expenses qualify for tax exemption under Coverdell rules that aren’t under Section 529 requirements.
Understanding the rules and regulations
Code Section 530, covering Coverdell ESAs, follows hot on the heels of Code Section 529 (those government sorts are sticklers for going in numerical order). In it, you find all the rules, regulations, and other assorted gobbledygook that govern these sorts of accounts.
Check out www.irs.gov/publications/p970/ch07.html for everything you ever wanted to know about Coverdell accounts.
Getting the most from a Coverdell account
You’ve probably discovered by now that successful savings involve far more than sticking your money in a passbook savings account at your local bank. And although your investment options are seriously limited with a Section 529 plan, you have far more latitude in investment decisions when you open a Coverdell ESA.
5. Exploring Different Ways To Save Money For College
People went to college long before an Internal Revenue Code existed, and parents and grandparents saved for college costs even when tax deferrals and/or tax exemptions weren’t around. You can save money in a lot of other ways, some of them even specifically for college.
Even though they may not be as tax advantageous as Section 529 plans and Coverdell ESAs, they may make perfect sense in your overall savings plan. And if you’re not able to save enough to cover the full cost, all is still not lost: Various scholarships, grants, and loan programs are available to cover any shortfall you may have between what you’ve saved and the cost of your child’s education.
Rediscovering U.S. savings bonds
Whether you’re able to save only small amounts, are uncertain about your potential student’s future plans, or love the safety and security found only in U.S. savings bonds, you may find them to be an attractive way to save for future college expenses and still take advantage of some tax exemptions on the interest earned on your bonds.
Putting your faith in a trust fund
For most people, the phrase trust fund brings to mind visions of great wealth and privilege; in other words, it has nothing to do with you. That picture couldn’t be further from the truth. If you’re able to save money in any form, you’re a potential candidate to create and fund a trust.
Saving in your retirement accounts
Using retirement funds to pay for college probably isn’t the best way to put away money for college. In certain limited circumstances, however (such as when parents are older or you face completely unplanned educational expenses), it may make some sense to access funds from a retirement account to pay qualified educational expenses.
Accessing your home equity
If you (or you and the bank) own your own home, you may be sitting on a larger nest egg than you ever considered. A combination of rising home values and shrinking mortgage loan balances has created a large pool of equity for many people that may be made available to fund educational expenses. However, recent housing market jitters and credit crises may have made this avenue less attractive. See our guide to home equity loans.
Identifying sources of scholarships
Not every potential student is an academic genius or a future first-round NFL draft pick, but you don’t necessarily need to conclude that your child won’t qualify for scholarships and grants. Your local high school guidance counselor or library should be able to point you in the right direction.
Many states now offer full scholarships to academically qualifying students at their state universities and colleges, and some private universities and colleges are cap-ping tuition costs for low- and middle-income families.
Borrowing to fill in the gaps
You’re probably reading this section because you don’t want to have to resort to borrowing money to pay for your children’s college costs. But if you do, it’s not the end of the world. Many types of financial aid are available at low-interest rates.
Learn more about the best ways to save money.