As students and families look ahead to college, the cost may seem daunting. Some families may not fully understand the price of tuition and fees, leading them to underestimate or overestimate what will be needed. And students may be reconsidering their goal of higher education because they believe it’s too expensive.
By creating a college savings strategy, with guidance from a financial advisor, families can use a variety of ways to meet costs and help students achieve their goals.
Research the cost
The College Board publishes average costs and trends in financial aid for public and private colleges and universities each year. Average tuition, fees, and room and board for the 2020-21 academic year increased by 1% to $22,180 for in-state students at four-year public colleges, according to the College Board. The same expenses at four-year private institutions rose by nearly 2% to $50,770. In recent years, college cost inflation has trended down — a win for families and students. Many remember the not-so-distant past, when college inflation increased much more dramatically and generally higher than core inflation.
How do families pay for college?
Most families rely on a combination of resources to pay for college. These include income and savings, scholarships and grants, and student loans. The majority of families use the parents’ income as a significant source. In the 2018-2020 academic year, 85% of families used parent income and savings and contributed $13,721 on average.
Similar to the previous year, 37% of families used a college savings plan, such as a 529, to cover the cost of college.
Advantages of a 529 college savings plan
Having an overall financial strategy is important as families strive to keep savings on track.
The 529 college savings plan remains a popular part of a savings strategy. One reason is the tax advantage.
- There are no federal income taxes on earnings while the account is invested. You pay no federal income taxes when the money is withdrawn to pay for qualified college expenses.
- Proceeds from a 529 savings plan account can be used at any accredited college to pay for tuition, fees, room and board, books, and other qualified expenses. In addition, up to $10,000 per student per year may also be used to pay tuition at any public, private, or religious elementary or secondary school.
- A special gift-tax exclusion allows five years’ worth of gifts to a single beneficiary in a single year without triggering the federal gift tax.
- In certain cases, contributions to the account can be removed from an estate for tax purposes, yet account owners retain control over the assets. This benefit is unique to 529 plans.
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