4 common questions about saving for college
How much? When? What kind of account? How to tackle the big questions around college financial planning—with its looming, uncertain price tag.
How much do I need to save for college?
The cost of college depends on a variety of factors, including whether the school is public or private. While public colleges receive funding from their states, private colleges rely heavily on donations and tuition. So tuition at private schools tends to be higher. In 2016–2017, the average cost of tuition and fees for in-state students at a public four-year college was $9,650, according to the College Board; a private four-year college was $33,480. You can use those numbers as a benchmark to estimate your tuition bill. Just keep in mind that costs are likely to be higher in 10 or 12 years.
What if I start saving late?
Look for ways to trim your budget so you can free up money to save. You can also ask friends and family to contribute to your child’s college savings in lieu of birthday gifts. Students might consider a two-year community college, where they can earn credits at a fraction of the cost of a four-year program. You can use that time to save, and your student may be able to transfer those credits to a four-year school later on.
What if I can’t possibly save enough?
Families pay for college from a variety of sources. In 2017, just 34 percent of tuition payments came from parent and student income and savings, Sallie Mae notes. Other sources, including scholarships, grants and loans, help pay the rest. A variety of government and private sources, including the schools themselves, offer these.
Tip: The federal government awards about $160 billion in grants, work-study funds, low-interest loans and other financial aid each year. To tap into that aid, you must fill out a FAFSA—the Free Application for Federal Student Aid.
How can a 529 plan help?
A 529 college savings plan is a tax-advantaged account designed to help families put away money for future college expenses. College savings plans generally offer a variety of investment options. In addition to offering the potential for tax-free growth, withdrawals from 529 plans, including any earnings, are tax-free when used for qualified higher education expenses such as tuition, room and board, computers, and books or supplies.1 Keep in mind that, as with any investment, a 529 can lose money.
Tip: Some states offer state tax deductions for contributions made to in-state plans; check with your state before choosing a plan.
- To be eligible for the favorable tax treatment afforded to any earnings portion of withdrawals for Section 529 accounts, withdrawals must be for “qualified higher education expenses,” as defined in the Internal Revenue Code. If the funds are not used to pay for qualified higher education expenses, any earnings are subject to income tax and an additional 10% federal tax, and may also be subject to state and local income taxes.
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