The cost of college tuition has been rising steadily for many years. Between 2010 and 2020, tuition and fees at four-year institutions increased 10% on average, according to the National Center for Education Statistics (NCES), with that figure rising to 19% for private nonprofit four-year institutions,
Taking a look at the numbers, tuition costs average $26,027 annually for a public, four-year, in-state institution. Out-of-state attendees pay even more at $27,091 - and private, nonprofit university students average annual tuition of $55,840. That's $223,360 over four years for just one of your children, according to the Education Data Initiative!
With so much money on the line for your child's future - and likely even more, if your kids are young - it can be quite daunting to figure out how you'll foot the bill for higher education. Today, we're going to look at three steps to help you take on the costs of your child's education.
Consider government-backed savings plans
The first financial step most parents are likely to take for their child's education is to put some cash into a savings plan. There are a few options to consider here, with three main government-supported savings plans that parents can use. These are the 529 plan, Coverdell Education Savings Accounts (ESA), and U.S. savings bonds.
The 529 plan is a tax-advantaged savings plan, with the ability to withdraw tax-free as long as the cash is being used for qualified education expenses. There are then two types of plans - one for college and one for prepared tuition plans. The college savings plan allows parents to invest that money to grow savings over time. Meanwhile, with the prepared tuition plan, parents can simply purchase tuition credits in advance to be used to pay for participating colleges and universities at a later date.
While the federal government does not offer matching programs for 529 plan contributions, some states do. Make sure you look into this when opening an account.
The ESA is another program parents can use, and it's similar to the 529 plan, though with a lower contribution limit. Whereas the 529 plan has no contribution limit, there is a $2,000 limit per beneficiary each year. Further, if you're making over $95,000 as a single person, or $190,000 as a family, you do not qualify for an ESA. The ESA is also a tax-advantaged plan, however, allowing for withdrawals for education expenses.
Finally, there are U.S. savings bonds, which are government-backed investments that can be used to save for education expenses. Right now is an excellent time to consider this option, thanks to higher interest rates. These assets earn interest monthly, and that interest is compounded semiannually. For those purchasing an EE bond at the current 2.5% interest rate, contributions are guaranteed to double in price in 20 years, according to Treasury Direct, “even if we have to add money at 20 years to make that happen.” There is a maximum contribution here of $10,000 and minimum of $25, making it a great option for Americans of all incomes.
It's also important to note that states may have their own savings programs, which could provide even more benefits to parents.
Leaning on loans
Some Americans may not have as much time on their hands - or as much discretionary income - to save for future education expenses. If that's the case, there are many benefit and loan programs to use from the Federal Student Aid website.
Pell Grants, for example, are need-based grants designed for low-income students. Direct Stafford Loans are federal student loans available to every student, no matter their income background, and Direct PLUS Loans are available to parents and dependents of students directly. Finally, federal work-study programs also provide support to allow students to work part-time and help pay for their education.
There were a number of loan and benefit programs that emerged during the COVID-19 pandemic, as well, but many have since been discontinued. Initiatives such as the loan payment pause and 0% interest loan remain active from March 13, 2020 until September 1, 2023. Another program was the in-school borrowers loan, which allowed students to defer payments while enrolled in school, with interest waived during the pandemic. This was also the case for loans in default, with the government waiving the rehabilitation requirement on loans during the pandemic.
Since some of these programs no longer available, let's focus on the ones that are. This includes income-driven repayment plans, aimed at reducing monthly bills based on income and family size. There are four ways to use this plan, with monthly payment caps ranging from 10% to 20% of monthly income.
Other accommodations for borrowers include loan forgiveness, deferment, forbearance, or consolidation. Loan forgiveness is offered if a borrow has made 120 qualifying payments while working full-time in public service. Deferment and forbearance allow a borrower to suspend or reduce loan payments for a variety of reasons, such as service in the military or financial hardship. Consolidation is another option, as it combines multiple student loans into one, creating simpler payments and often lower rates.
Getting into grants
While some parents may be willing to shoulder most of the burden of paying for their child's education, it can be helpful - and even rewarding - to involve your child, as well. This can give them life skills of learning to save, with the achievement of helping to pay for their own education.
One way to involve your child is to set up savings goals together. Bring them to meetings with your financial advisor, and have them agree to what they think is a reasonable goal - and perhaps how much they can contribute to it.
Further, discuss the options of scholarships and grants that might be available to them. Help them with the research, and go through the application processes together. Again, being rewarded with grants and scholarships is another way for your child to find pride in helping finance their own education.
Then, once you've decided on goals for both you and your child, set up automatic savings contributions. This will help both you and your child save for school, without even thinking about it.
No matter which of these options work best for you and your children, it's important to do two things: start as early as possible, and meet with a professional advisor every so often. This will help you reach your goals sooner and with less pressure on your finances, and help keep you on track to your targets. An advisor will also help to make sure you're taking advantage of all available benefits and programs. Because before you know it, you'll be waving them off to school (trust me).
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
