As another school year draws to a close and a joyous graduation day celebration passes, the chances are that, as a parent, you are about to face the greatest expense yet – college!
Unfortunately, just being mentally prepared to release your grown child into the big, wild world isn’t going to cut it. You are also going to have to be financially prepared. Depending on your particular situation, that may mean utilizing a combination of college savings vehicles as well as exploring the potential for “needs-based” or “merit-based” grants, loans and scholarships.
It Costs What??
For those that sent their children to private K-12 schools, college costs will continue to be a big recurring budgeted item, except now you will also be paying for additional lodging, travel, etc. For those families that utilized the public school system, your time has now come. You cannot hide any longer. It’s time to part with some big money.
So, just how significant of an expense is college? Let’s just say that the costs of tuition, fees, lodging and other expenses associated with obtaining a higher education have become borderline obscene. Recent reports suggest the average total cost of a four-year in-state college education now stands at roughly $100,000 while the average out out-of-state and private four-year universities cost $150,000 and $200,000, respectively.
The chart below illustrates how much more the cost of tuition has gone up in the last few decades as compared to other non-discretionary expenses.
No doubt, these staggering costs are having a profound impact on how families plan to pay for college and determine whether attending a certain school is worth the investment.
Be Tax Savvy and Systematize
Hopefully, you’ve been utilizing some college savings vehicles (i.e. 529 Plans and ESA’s) to get an early jump on putting funds away to cover some, if not a substantial portion of these costs. The key benefit of 529 Plans and Education Savings Accounts (ESA’s) is that savings in these accounts grows tax deferred, and if the funds are used for qualified higher educational expenses the earnings are tax-free.
529’s and ESA’s can be used as long as the funds are for any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. This includes most accredited public, nonprofit and privately-owned–for-profit post secondary institutions as well as some international schools. See a list of schools where you can use your plan funds.
If you started aggressively saving in a 529 Plan at the time of your child’s birth and systematically added to the plan over the next eighteen years, you could make a significant dent, if not cover all of the cost of an undergraduate education.
Another option funding for college is a Prepaid Tuition Plan. These plans offer the ability to lock in the cost of tuition in the future by paying for it today. This type of plan hedges against spiraling tuition costs, but does not cover any other college related expenses.
For a more detailed comparison of these college savings vehicles, click here.
What Else Can You Do?
While most families will rely on some combination of the above mentioned savings vehicles, you should also understand and explore the potential for utilizing federal grants, loans, and scholarships to help cover the costs. Just because you may be financially well-off doesn’t mean you shouldn’t evaluate whether your student may qualify for any needs-based assistance. Understanding how colleges view a family’s financial situation can help you plan more effectively as you may be surprised what factors most influence financial aid.
SMS can help you understand your expected college costs as well as create a sound plan for covering them.