Saving for College: What Are Your Options?

Many people agree that the benefits of going to college are worth the expenses involved. And lifetime earnings data bear that out.

Individuals with a 4-year Bachelor’s degree bring home about $1 million more in median lifetime earnings compared to those with only a high school diploma.

Most people also know that going to college is expensive. According to the College Board, average in-state tuition for public universities for the 2016-17 academic year was over $24,000, and for out-of-state students the average was more than double that amount at $49,000.

It’s important to note that most students qualify for some type of financial aid — such as need-based grants, work-study programs, federal loans, tax credits and other deductions — to defray at least some of the cost of tuition, fees, books, room and board and other expenses.

But unless you get a full scholarship, you’ll be responsible for at least some portion of the cost. Many people take out student loans, which can lead to years of debt long after graduation day.

Another option is saving for college ahead of time, which may eliminate or minimize your need to go into debt to finance your or your child’s education. A study published in 2016 found that 72% of parents had started saving for their child’s college education, but were on track to cover only 29% of their funding goals.

So how can you make sure you have enough? Keep reading to learn about different options for saving money for a college education.

529 College Savings Plans

A 529 college savings plan, administered by individual states, allows earnings to grow on a tax-deferred basis, and withdrawals are tax-free as long as they are used to pay for qualified education expenses, which may include the following:

• Tuition
• Fees
• Books and supplies
• Equipment required by school
• Room and board
• Computers and printers

Anyone of any age can have a 529 account, and it can be used at colleges and universities throughout the United States, as well as some overseas institutions.

You can invest in any state’s 529 plan, not just your home state, and you may open a plan in more than one state.

For example, Missouri offers a plan called MOST 529. In addition to tax-deferred earnings and tax-free withdrawals for qualified expenses, the plan also offers state income tax deductions.

• Anyone can open a MOST 529 plan. You can use it to save for your child, grandchild, a friend — or even your own college education!
• If your original beneficiary doesn’t end up using the money, you can transfer the account to another beneficiary.
• You may contribute up to $325,000 to a single 529 plan.
• It’s free to open, and you can make contributions as little as $1.

Prepaid Tuition Plans

Prepaid college plans let you lock in future tuition payments at today’s rates. Tuition can be paid in a lump sum or on an installment basis.

• Most colleges and universities participate in prepaid tuition plans.
• You’ll need to check with individual states to see if they guarantee all or only part of the rate you prepay.
• Most states require you or your child to be a resident of the state where you prepay.
• Prepaid college tuition doesn’t include investment options like a 529 savings plan.
• Prepaid tuition doesn’t cover other expenses such as room and board.

Coverdell Account

Coverdell Education Savings Accounts, formerly known as Education IRAs, are another tax-advantaged way to pay for college and can also be used to pay tuition for private elementary and high schools.

Coverdell ESA plans offer a wide array of investment options, and withdrawals are tax-free if used for qualified educational expenses. It is also possible to have a Coverdell plan and a 529 plan simultaneously.

Life Insurance

Some life insurance policies also offer a way to save for education expenses.

A variable life insurance policy, for example, allows the holder to take out a loan against the cash balance portion of the policy. There are two possible benefits of using life insurance to pay for college:

• Flexibility. Suppose your child enters a career that doesn’t require a college degree? If you have a 529 plan, one possible drawback is that your funds are taxed if they are withdrawn for any purpose other than education expenses. With a variable life insurance policy, you have more freedom to use the funds for other purposes.
• Financial aid advantage. A 529 plan is considered a “parental asset” for the purposes of determining financial need, which may lower the amount of assistance you’re able to get. A life insurance policy, however, is not included in financial aid calculations, which means it could potentially help you spend less on college expenses.

Tips on Saving for College

Regardless of how you plan to pay for your or your child’s education, there are a few things to keep in mind if you’re setting up a college fund:

• Start saving early. While it’s never too late, the earlier you begin saving for college the better — many pregnant women even start saving before the child is born. The earlier you start, the more you can potentially save and the more flexibility you’ll have to adjust your strategy as your family’s income and needs change.
• Include all costs in your savings plan. College is more than tuition. You’ll also need enough to cover fees, books, and room and board.
• Think about financial aid. The more money you have saved for college, the less financial aid you may qualify for. If you have enough to pay for all of your expenses, this may not be an issue. Otherwise, you’ll want to structure your savings plan to maximize financial aid eligibility while covering costs.

Consumer Reports also offers the following advice on lowering education expenses:

• Consider enrolling in a less expensive community college for the first two years, then transfer to a four-year university.
• All students may complete a Free Application for Financial Student Aid (FAFSA). It is a good idea to fill out a FAFSA for each academic year that you enroll.
• Take advantage of all financial aid, scholarships and work-study opportunities you are eligible for.
• Choose thrifty meal and housing plans
• Don’t use loans for nonessentials like entertainment and furnishings.

Do you have questions about how to pay for college?

Talk to us at The Resource Center. We’ll provide information on all of your college funding options so you can choose the best strategy for you or your child.

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation. We are able to provide you with information but not guidance or advice related to federal benefits. Our firm is not affiliated with the U.S. government or any governmental agency. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and The Resource Center are not affiliated companies. AW12175556