Ultimate Guide to Understanding How to Pay For College


It’s no question that a college education is one of the most expensive things you’ll need to pay for in your lifetime. Fortunately, there are plenty of smart strategies parents and students can use to keep their college expenses down.

When looking at how to pay for college, you need to examine the type of degree you or your student will get, how much it costs to get qualified for a certain career, and the typical career path and career salary to expect.

College expenses can vary widely, depending on where your student attends, whether they can get college credit in high school, how much they earn themselves, and how much they finance through scholarships and grants. Let’s consider all of these factors and the options you have to finance your child’s college education.

Is College Still Worth the Debt?

There’s a lot of talk circulating about the student loan crisis and how tough it can be to get out from under the weight of student loans.

According to Forbes, he average student loan debt for graduates of 2018 was $29,000. Of course, plenty of students graduate with much higher loan totals, and others graduate with less. It’s even possible to get a college degree without a penny of debt—although this requires quite a bit of advance planning and hard work.

The question of whether college is worth the debt is complicated. You need to consider multiple factors in your decision. However, it seems pretty clear that it’s essential to consider the ROI, or return on investment.

Gone are the days of sending your child off to the prestigious school just to “find themselves” or “become well-rounded”. Plus, having a college degree is not a guarantee of a good career or even a job at all.

To determine if college is worth the cost and potential debt, think about how much it will cost versus the potential career earnings for the student. Your goal is essentially to keep the cost of college as low as possible, while leveraging a degree to build a better career path and income.

How to Decide Which College to Attend

First of all, use common sense in choosing a college. Parents, help your students to make wise decisions here!

It’s usually a big money-saver to stay in your home state, for starters. It may sound fun to pick the farthest-away college or one that’s near the beach, but if it’s not in your home state, be prepared to pay thousands more per year.

Think about the majors and programs offered at the colleges you’re considering. Do your research and find out which schools are known for doing a great job of preparing students in the career field you’re pursuing.

It’s also important to realize that the school you attend only really matters in a few careers. In fields like medicine or law, for example, it may be worth a higher price tag to go to a better-ranked school. However, it might also be good to try and keep your undergraduate costs down if you expect to need to go to graduate school after that.

If you’re getting a degree in elementary education, you likely won’t get much benefit from attending an elite school. You’ll be able to get a teaching job in just about any state regardless of where you get your degree, so minimize your college costs.

Finally, think a bit about the atmosphere where you’d be most comfortable. It can be good to look at factors like whether it’s a large or small school.

How to Calculate How Much You Will Need For College

If you’re a parent, you’ve thought about how you’ll finance college for your kids. It’s a huge source of stress. Fortunately, there are simple steps to help you calculate how much you’ll need.

Don’t Ignore Retirement

The first rule of thumb to follow if you’re a parent: put your own retirement savings first. Then, if you have enough money to set aside for future college expenses, go for it.

It may seem selfish, but remember that kids can take out loans to pay for college. You can’t, however, take out loans to pay for your retirement years. Your kids will thank you for setting yourself up comfortably for retirement, so you won’t have to live in their basement!

Parents, keep in mind that while a college education is certainly a plus in most cases, it’s by no means a requirement for parents to pay their kids’ way. We all have very different circumstances, and not every parent can afford to save much money for college expenses.

Set a Savings Goal

Some parents set a goal of saving 100% of their children’s college expenses, while others may only save a few thousand dollars.

One commonly accepted guideline that you might aim for is to save one-third of the total cost of your child’s college expenses by the time they graduate high school. Then, you can reasonably expect to cash-flow another third with your income and your child’s income. The final third of expenses could be financed through student loans.

A third of the total cost of a college education is still a daunting goal, but it’s much more attainable than 100%.

Whatever you decide you’re able to do as a parent, be up-front with your children. Let them know early on how much you’ll pay for. (You might also add any stipulations you like, such as a GPA you expect them to maintain, or requiring them to work part-time through school.)

While it may be disappointing to hear that you won’t be paying their full way through college, it’s better that they know right away so they can plan accordingly.

Calculate Expenses For College

To figure out approximate dollar amounts, look online to find some useful college calculators. You can input the age of your child(ren), the current cost of tuition and expenses at a potential college, and even factor in the inflation of expenses. Use these handy calculators to determine how much you could save in the amount of time you have. CollegeBacker has a great calculator that shows you instantly how your investments in a 529 for your student will grow over time.

5 Ways to Save For College

1. 529 Savings Plan

The 529 is considered the gold standard of college-savings plans. Growth on the money you invest there won’t be taxed, and your child won’t be taxed when they withdraw the money. You can contribute up to $15,000 per year (in 2020) without gift-tax consequences. The gift tax just means you’ll be taxed more on any contributions above that amount.

A few key aspects:

  • Maximum $15,000 contribution per parent per year
  • Earnings grow tax-free
  • Tax-free withdrawals on qualified education expenses
  • No income limits

The earnings in 529 contributions will grow tax-free, just like in a Roth IRA. Considering you’re probably saving for college over a number of years, that growth can be substantial!

When your child withdraws money from their 529 for qualified higher-education expenses, they pay no tax on that money. It’s a great tax-advantaged way to fund a college degree.

Be aware that any withdrawals from a 529 that are not used for qualified education expenses will be taxed, plus there’s an extra penalty on top of your normal tax rate. So be sure that your child is highly likely to attend college and be able to use the savings from a 529 before you start contributing. You don’t want to be stuck paying those penalties should your child decide not to attend a qualified school.

CollegeBacker

CollegeBacker is a free platform that makes it super-simple for families to invest in a 529 Savings Account for educational expenses. Their mission is “to make college affordable for every American family”.

You can set up a 529 account for someone in 5 minutes online, and then easily start saving money for college tax-free. They also help you create a gifting page that you can share with loved ones who may want to contribute to the plan.

CollegeBacker is a SEC registered investment advisor, meaning they have a fiduciary duty to put your best interests first and to not collect commissions. They’ll recommend low-fee investment options and gradually reduce the risk to you as the child grows closer to college-age.

The handy online calculator is a fun and easy tool that can show you the impact of every dollar you invest in the 529 account. For example, here are some options for saving for a child who is currently 5 years old:

  • If the parent contributes $75 per month, and 2 family members also contribute $5 a month, by college age, their account will have $21,500
  • If the parent contributes $150 per month, and 4 family members also contribute $10 a month, by college age, their account will have $48,100

This tool can help you visualize the savings goals for your child. It’s easy to instantly adjust the amounts of contributions and see how that affects the total growth over time. Use the calculator in conjunction with estimates on college tuition and expenses for schools near you, and that will help you make informed decisions on saving and college choice.

As with any 529 plan, the money in CollegeBacker 529 plans will grow tax-free, and can be withdrawn tax-free for qualified education expenses.

2. Coverdell Education Savings Account

The Coverdell ESA is a tax-deferred trust account to help families save for college expenses. They can be utilized for a range of educational expenses, and it’s not just limited to college. Any K-12 eligible school expenses can be paid through a Coverdell ESA.

Family members can contribute up to $2,000 per year to a child’s Coverdell savings account. You do have to be below a certain income level to be eligible to contribute to a Coverdell ESA. It’s possible to have multiple people contribute to a Coverdell, as long as the total doesn’t exceed the $2,000 annual limit.

Funds that remain in a Coverdell account must be disbursed by the time the child reaches age 30, unless the beneficiary has special needs.

Key aspects of a Coverdell ESA:

  • Use for any K-12 eligible educational expenses
  • Maximum of $2,000 contributions annually
  • Funds must be disbursed by the time the child is age 30

3. UGMA/UTMA Custodial Accounts

The UGMA (Uniform Gift to Minors Act) and the UTMA (Uniform Trust to Minors Act) Custodial Accounts provide another option for college saving. They’re accounts that allow you to take advantage of the lower tax rate on minor children, but the assets are part of the custodian’s estate until the child takes possession.

There are no contribution limits and no income limits on these accounts. The UTMA allows only the donation of basic assets, while the UGMA also allows gifts like money, stocks, or life insurance.

A student named as beneficiary of these accounts will avoid tax implications until they reach the age of majority, which in most states is 18 or 21.

Funds in these custodial accounts are generally used for educational expenses. There is some flexibility, however, since the donor is allowed to make withdrawals for other expenses that benefit the student.

Something to consider is that the UGMA and UTMA accounts can impact a student’s eligibility for federal aid later on, which may be problematic.

4. Your Own Investment Account

When you use your own investment accounts to fund a college education, you don’t need to worry about contribution limits or income limits.

Earnings on these accounts are taxed to the owner. You benefit by keeping control of the assets. Another nice benefit is that in case the student decides not to attend college or a qualified higher-education institution, you won’t face any penalties since these were not school-specific accounts.

Learn More: Best Automatic Savings (& Investing) Apps to Round Up Savings

5. Your Roth IRA

Using your Roth IRA to help pay for college may not be ideal. After all, it’s intended as a retirement account. However, you can withdraw money from a Roth IRA to finance a portion of your child’s college expenses.

You’ll pay taxes on any gains to the funds. In 2020, the maximum contribution for the Roth IRA is $6,000 per individual (or $7,000 if you’re age 50 or older).

How to Save For College if You Started Saving Too Late

All parents want the best for their kids, obviously. But circumstances don’t always allow for massive college savings. Don’t beat yourself up if you have a child who will soon reach college age, and you don’t have much money put aside for their education.

Again, be sure to talk openly with your child about what you can or can’t contribute to their college expenses. Be honest and let them know that paying for college is primarily their responsibility, not yours. Honestly, it might help build their character and help them out in the long run, because they’ll have more “skin in the game” regarding college costs.

Save What You Can

Even if you only have a few years left before your child begins college, you can still save now. Every bit of money you can afford to save will assist with those tuition expenses.

A 529 may be worth it, depending on how much time you have to invest. With a shorter time frame, you have much less potential for growth on your investments.

Liz Weston, author of the book There Are No Dumb Questions About Money, warns of the risks of using a 529 on a short timeline. She says, “You wouldn’t be getting any real growth, so the tax benefit of a 529 plan is miniscule. What you would get are restrictions on how to use the money and possible complications for your tax returns. If you want to use education tax credits, for example, you won’t be able to apply those on expenses you’ve paid with a 529 withdrawal.”

In other words, consider the risks of a 529 if you’ll need to make withdrawals in the next few years. For shorter time frames, you may want to just pick a high-yield savings account for your kid’s college fund.

Help With Financial Aid Applications

As a parent, you can offer guidance and motivation to your child to complete all of the grant and scholarship applications possible. Applying for grant money can be almost a full-time job for a high school senior.

Be sure your child is doing the work of researching grants and scholarships they’re eligible for, and getting their applications in on time.

If you plan on using federal loans at all, the FAFSA (Free Application for Student Aid) is a must. Look for information from your child’s school (or check online) and be sure to be prompt and accurate when filling out the application. School counselors often provide free training on FAFSA completion, in case you’re anxious about it.

Student loans don’t have to be an evil thing. As long as you approach them sensibly and plan to pay them back in a timely fashion, they can be a really valuable tool in getting a college degree.

Encourage Wise College and Career Choices

Give your student guidance on how to choose the right school for them. Knowing their budget, including how much you’ll contribute, can help them to pick a moderately-priced school over a top-tier “status” school.

Remind your child that college truly is an investment, so they need to be aiming towards the goal of a degree they can use to find a good career. They don’t have to become wealthy, but they should balance the cost of the degree with the potential career payoffs.

One possibility that could save money on college costs is having your child live at home for part of their college years. This might not sound as exciting to them as living on campus, but when room and board at many universities can add an extra $10 grand or more to the yearly cost, it’s definitely worth considering!

Finally, be sure to encourage your student to practice mindful money management. Before, during, and after college, they’ll need to be able to be responsible with money. Teach them how to create and adjust their budget from month to month.

Read More: The Best Personal Finance Budget Software with Apps

What You Need to Know About Student Loans

Phrases like “student debt crisis” may have you concerned about taking out student loans. But it’s really possible to use student loans as a useful tool that improves your child’s trajectory in life.

That said, it is important to minimize the dollar amount you or your child will borrow for education. You can do this through multiple ways: students working part-time through high school or starting their own small business, applying for many grants and scholarships, and choosing a reasonably-priced school.

FAFSA

As mentioned earlier, you want to learn the rules about the FAFSA (Free Application For Student Aid) and submit your application as soon as possible. This will determine how much aid and what type of aid your child is eligible to receive.

Make a Wise Degree and Career Choice

Be sure that your child is working towards a solid goal in a valid career field. When spending so much money on a college degree, it would be foolish not to get a degree that will lead to a good income.

Look into resources that can tell you the median income for various careers. Whatever your child is interested in, they need to find out how much they can likely earn in that career field.

Have a Clear Payoff Plan

Before even signing on the dotted line for student loans, you (or your student) should have a plan for paying them off. Even though you can’t know your post-grad income and expenses exactly, being aware of how the payoff plans work is essential.

Look at factors like the interest rate on your loans. Use handy online calculators to figure out just how much you’ll owe after four years, how much the minimum payments will probably be, and the length of loan payoff. Play with the numbers a little bit (and revisit those figures each year during college and repayment) to figure out how quickly the student debt can be gone.

Paying off student loans is an important responsibility. It may sound tempting to pick “income-based repayment” or to defer your loan repayment as long as possible, but the risk of those options is that the debt keeps hanging around and the interest keeps accruing.

Getting out from under student loan debt, as early as possible, is a huge step toward building wealth as an adult. So when you take out student loans for college, be sure you can pay them off promptly!

Related: How to Get Out of Debt

Find Your Perfect Mix of College Funding Options

There’s not really a one-size-fits-all approach to paying for college. You can do your research and play with the choices to find the perfect mix of college funding options.

It’s likely in your best interest to fund college through multiple avenues. You might use some combination of the following:

  • Scholarships and Grants (go for these first!)
  • 529 Savings Plans
  • Coverdell Savings Plans
  • Federal Work-Study Programs
  • Federal Student Loans
  • Other Investment Accounts

Yes, paying for college can be a hefty task. From determining the value of going into debt, to calculating how much it will actually cost, to finding out the best ways to save, it’s a lot to figure out.

Fortunately, there are plenty of great resources and people who can help you navigate the job of getting yourself or your child through college. By using the guidelines discussed here, you can make smart college decisions to help lead to a bright future.

How do you plan to pay for your child’s college education? How did you pay for your own college education?

Image by Ryan Jacobson on Unsplash

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. You say not invest in a 529 plan.  What about an educational IRA for your kids?

  2. Julie at The Family CEO says

    This was our situation exactly. We had a little set aside for college, but not much, and the crash of 2008 happened just before we were going to need it. With a daughter in college and a son in high school, we’re employing an “all of the above” strategy. We’re combining an affordable school, some scholarships, part-time work for my daughter, and current earnings (my online, freelance writing income goes toward this goal) and so far we’ve been able to avoid any debt. It’s not easy, but it can be do-able.