How to Save for College

June 21, 2021 · 8 minute read

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How to Save for College

College is expensive. Now that we’ve gotten that out of the way, let’s roll up our sleeves and get to work so that we can make college happen for our kids.

We are going to tackle this by taking a high-level look at breaking down the cost of college and then covering net price versus sticker price. We’ll discuss many of the options you may have when it comes to saving for your child’s college years.

Before we jump in, though, we want to point out that everyone’s life and financial situations are unique. That means that while some of these tips might apply, some may not.

We always suggest you speak with a qualified financial advisor before making any major decisions related to your finances. Only you (and they) will know what’s going to be the best plan for you.

Let’s get started!

Determining the Cost of College for Your Children

Keep in mind that there is no one solution to saving for your kid’s college. Tuition costs tend to fluctuate based on the type of school your child wants to attend, the type of degree they’ll earn (bachelor’s or associate), and even geographic location.

According to the College Board, the average annual tuition costs for the 2020-21 school year were:

•   $10,560: public four-year in-state institutions (a 1.1% increase from 2019-20)
•   $27,050: public four-year out-of-state institutions (a 0.9% increase from 2019-20
•   $37,650: private nonprofit four-year institutions (a 2.1% increase from 2019-20)
•   $3,770: public two-year in-district (a 1.9% increase from 2019-20)

The College Board also studied the annual rate of increase for the average cost of college over the last decade:

•   2.2%: four-year public universities
•   2.0%: two-year public universities
•   1.9%: four-year private (nonprofit) universities

Despite the average tuition costs, don’t assume that a public school will always be a better deal than a private school. “A student can sometimes get a better financial deal to attend a private school than if they were to attend a public school,” Andy Stiles, director of admissions at Ottawa University, a private liberal arts college in Kansas, told US News & World Report .

“A big factor in this is the institutional scholarship. The scholarship at a private school may be larger than a public school to make their overall cost, out of pocket, more competitive to a public school.”

Net Price vs. Sticker Price

The net price of college tuition is typically lower than the “published,” or “sticker” price. The net price is what a student would actually pay, after factoring in financial aid and any tax credits.

Consider this: Take the average published tuition price for a private institution—$37,650 per year. However, in actuality, the average family in this hypothetical might pay only half that. How do you get this net price? By subtracting need-based aid, merit-based aid, work-study funds, etc.

Private nonprofit institutions may offer some combination of grants, scholarships, and fellowships to offset the sticker price.

This practice is known as “tuition discounting.” According to the National Association of College and University Business Officers , private nonprofit institutions discounted their first-year tuition at a record high during the 2020-21 school year (the most recent stats available). The final tally was an average discount of nearly 54%.

Using a Net Price Calculator

You don’t have to be a math whiz or a professional economist to figure out how much you’re going to need to stash away for your child’s higher education. The Department of Education offers a net price calculator right on their website.

This tool may help students and their get a better idea of the cost of college, after subtracting scholarships, grants, and other financial aid.

Keep in mind, though, that a net price calculator is going to require specific details about your income and assets, so the more transparent you are regarding your personal finances, the more precise your calculation is likely to be.

When is a Good Time to Start Saving for Your Child’s Education?

It may seem obvious, but let’s make it official: now. It’s never too early to start an education fund for your child. It’s all about giving yourself and your child a head start.

Starting earlier also means you’ll likely have more time to change savings direction along the way, if need be. Later on, if your child develops an aptitude for sports, art, theater, or writing, or any other specific field, it’s possible to look into financial aid and scholarships that may support that talent.

That said, meeting other financial goals is also important. Some may focus on paying off credit card balances and other high-interest debt, and working toward making their own student loans a faint memory of the distant past.

In addition, creating an emergency fund that covers three to six months of living expenses can provide a financial buffer in the event of unexpected expenses. Another focus, staying on track for retirement.

It is absolutely critical that parents have their own financial plan in solid shape before saving or paying for a child’s education. At the end of the day, students are able to borrow student loans for an education but it’s not possible to take out loans to fund retirement.

Some Options for Saving

529 Plan

A 529 plan allows you to save for future education costs while you benefit from certain tax breaks. Why the odd name? The plan is made legal by Section 529 of the Internal Revenue Code.

Prepaid tuition plans – This is a type of 529 plan that allows account holders to purchase “units” (credits) at participating colleges and universities.

Education savings plans – These 529 plans let account holders open an account to help save for qualified educational expenses, which is broader than simply tuition and fees.

In a nutshell, a 529 savings plan allows account holders to invest after-tax money based on their comfort with risk and options available in the plan they selected. Withdrawals made for qualified expenses can be made tax-free.

Additionally, residents in some states may receive a state income tax deduction or credit for contributing to a 529 savings plan. This varies state-by-state, so it is important to understand the rules that apply to your unique situation.

Additionally, 529 savings plans may offer an age-based investment option to automatically adjust the risk of the investment strategy as the beneficiary gets older. This type of investment approach might be similar to how a target date fund works in your retirement plan.

Regular Savings Accounts

For these accounts it’s a good idea to compare and contrast interest rates. For the most part, current bank rates on regular savings accounts are relatively low.

It may be difficult to reach education financing goals through a traditional savings account alone since the interest rate might not keep pace with the inflation of college expenses.

Roth IRAs

These are individual retirement accounts that let you save and invest after-tax money. Currently, you can request a distribution after age 59 ½ without penalty or taxes.

It is possible to make a withdrawal from a Roth IRA before turning 59 ½ to pay for college expenses for your children. Withdrawing contributions (not any earned interest) does not generally incur taxes or penalties.

Those withdrawing any earnings may be able to avoid penalties if the distribution is used for qualified education expenses. Additionally, it might also be possible to avoid taxes on earnings if the Roth IRA has been open for more than five years.

It is important to keep in mind that a Roth IRA is designed for retirement savings and it could be worth consulting a tax professional before making any decisions about withdrawing from retirement funds.

Other Options to Pay for College

Sometimes saving alone isn’t enough to cover the cost of college. In that case, there are other types of aid available that could help students and their families pay for college.

Private Scholarships

Usually, private scholarships are offered by associations, unions, religious organizations, nonprofits, and other types of groups. And… (drumroll, please) you generally don’t have to pay them back. They sometimes cover all four years of education.

Often scholarships are offered on merit and ability alone (for example, sports, music, or science scholarships); however, some are awarded on the basis of nationality, ethnicity, or economic need. A couple of places to look for scholarships are and College Board .

Federal Financial Aid

Annually, students can fill out the Free Application for Federal Student Aid (FAFSA®) to apply for Federal financial aid. This includes things like federal student loans, work-study, and grants and scholarships.

Related: SoFi’s FAFSA Guide

Private Student Loans

For families that still need help funding a child’s education after exhausting their federal aid options, private student loans might be worth considering. SoFi, for example, offers private student loans and parent student loans to help pay for school.

SoFi’s private student loans are no fee and low-rate, plus there are flexible repayment options.

The Takeaway

College tuition can be a daunting expense. Setting up a dedicated account to save for college tuition can help streamline the process. There are accounts, like 529 plans, that are designed specifically to pay for educational expenses.

In addition to savings, students and their families may rely on scholarships, grants, federal student loans, or even private student loans to pay for tuition and other educational expenses.

Learn more about private student loans with SoFi today.

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