The cost of tuition has increased significantly over the past couple of decades, and there’s no sign of it slowing anytime soon. With the average cost of a four-year bachelor’s degree from a private school surpassing $220,000, gaining a higher education is becoming increasingly intimidating. As the parent of an aspiring college student, navigating the complex terrain of educational funding can be overwhelming. The key to overcoming this complexity is knowledge—understanding your funding and scholarship options, how to secure them, and their regulations.
Remember to Overestimate Your Budget
Before delving into your funding options, it’s important to stress the importance of overpreparing. Take the time to dig into the overall cost of sending your child to their dream school. Luckily, most schools provide an estimated total cost of attendance each year but don’t stop there. Do your research! Check out bus fares, textbook prices, and housing options to nail down a more accurate number. Mary Banks, former admissions committee member at Columbia University and author at Quad Education Group, says: “It’s a good idea to play it safe by overestimating your budget to account for unexpected costs and make sure you’re fully ready for whatever comes your way.”
Savings Plans
The following savings plans can offer you a good place to start saving for your child’s education:
529 College Savings and Prepaid Tuition Plans
529 plans are qualified, state-sponsored tuition programs to save for your child’s education. There are two 529 plans you can choose from.
Prepaid Tuition Plans
Prepaid tuition plans allow parents or guardians to lock in today’s tuition rates at specific universities, a valuable advantage in light of the continual rise in tuition costs. Payments can be made either as a lump sum or through installment payments, covering tuition for one to five years. When your child is ready to go to college, the plan transfers funds directly to the institution to cover the tuition. Most states guarantee that the funds you put into a prepaid plan will keep pace with tuition. While this option is highly effective in managing future tuition expenses, it’s crucial to note that the majority of prepaid plans exclusively cover tuition. Other essential costs such as housing, travel, textbooks, and personal expenses must be considered separately.
Savings Plan
On the other hand, 529 savings plans act as investment accounts, allowing parents to contribute money that can be invested in a variety of ways, such as mutual funds. These plans can save money for qualified college expenses, including tuition, fees, room, board, textbooks, and equipment. The earnings on these investments grow tax-deferred, and if the funds are used for qualified educational expenses, the withdrawals are tax-free. This savings plan has high risk and high reward. The value of the investments can go up or down based on market conditions, so it’s important to do your research. For instance, index funds like the S&P 500 are a relatively low-risk option with a consistent track record of high growth. The other catch is this plan doesn’t lock in tuition prices.
Coverdell Education Savings Accounts (ESA)
Coverdell Education Savings Accounts (ESA) are similar to a 529 savings plan. They’re trust accounts designed for the savvy education saver, giving you the freedom to contribute funds that can cover a range of educational expenses: tuition, books, equipment, and even academic tutoring. Again, account contributors have the flexibility to invest in a variety of options. While the contributions to a Coverdell ESA aren’t tax-deductible, the earnings on those contributions grow tax-free, adding a layer of financial benefit. You’re only allowed to contribute up to $2,000 a year to this account if your income is $95,000 or below for single taxpayers and $190,000 or below for married taxpayers. If it’s higher, your contribution limit is even lower. 529 savings plans do not have contribution limits or income level restrictions. As such, many parents have both 529 savings and ESA accounts for maximum savings.
Other Investments
Of course, you’re not limited to predefined savings plans. Feel free to carve out your investment path, whether through stocks, bonds, index or mutual funds, or any other avenue that suits your preferences. The key is to consistently contribute over time to see substantial growth. Some parents even begin investing from their child’s first birthday!
Financial Aid
Whether you are too pressed for time to invest, unable to open or contribute to a savings plan, or just in need of extra assistance, there are various forms of financial aid available to help finance your child’s education.
Free Application for Federal Student Aid (FAFSA)
The most popular form of financial aid students receive is through FAFSA. Students can fill out FAFSA forms to determine how much financial aid they’re eligible to receive, which could include grants, scholarships, work-study funds, and loans.
Parent PLUS Loans
The Parent PLUS Loan is a federal loan program that allows parents of dependent undergraduate students to borrow money to help pay for their child’s education. This loan can cover the full cost of attendance minus any other financial aid received. While this loan can provide a more substantial amount than FAFSA, it’s important to note that it generally comes with higher interest rates.
Scholarships
Scholarships and grants can also fund your child’s education. The best part of this type of aid is that it doesn’t have to be paid back. Many schools hand out automatic merit-based and needs-based scholarships to new students, which can cover part or even the entire tuition cost. Students can also explore full-ride external scholarships for comprehensive financial support.
Final Thoughts
While it’s often argued knowledge is priceless, the current average annual tuition costs surpassing $30,000-$55,000 suggest otherwise. However, despite these steep expenses, you can make financing your child’s education more manageable. By gaining a clear understanding of the actual costs, starting your financial preparations early, and understanding your options, you can successfully navigate this challenging terrain and alleviate the financial stress associated with putting your child through college.
