College is expensive. Now that we’ve gotten that shocking fact 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, here’s what we’re dealing with when it comes to average annual tuition costs and school types:
• $10,440: four-year public institutions (in-state)
• $36,880: four-year private institutions
• $3,739: two-year public institutions
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
It is worth noting that the average annual increase has actually decreased compared to the prior decade, so this is just a snapshot in time rather than projection of future rate increases.
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 U.S. 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
When you’re kicking the tires of a new car in the showroom, you’ll notice that the sticker price on the car window is actually the manufacturer’s suggested price. That price includes all the bells and whistles that you may or may not want in your new car.
After that, comes discounts, the exclusion of certain options, and even some negotiating to get a better price. The result will be your net price. It works somewhat similarly when it comes to college tuition.
The net price of college tuition is typically lower than the “published,” or “sticker” price. The net price is what you would actually pay, after you factor in financial aid and any tax credits.
Consider this: Take the average published tuition price for a private institution—$36,880 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 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 institutions discounted their freshman tuition at a record high in 2017–18 (the most recent stats available). The final tally was an average discount of nearly 50%.
That’s nothing to sneeze at. What this means is that you shouldn’t necessarily let an institution’s sticker price scare you away.
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 you get a better idea of the cost of college, after you subtract 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?
You probably already know the answer to this, but let’s make it official: now. It’s never too early to start an education fund for your child—perhaps even before they are born. It’s all about giving yourself and your child a head start.
It also means you’ll likely have more time to change your 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, you can look into financial aid and scholarships that may support that talent.
That said, it’s a good idea to first set yourself as free as possible: you can try to pay off credit card balances and other high-interest debt, and work toward making your own student loans a faint memory of the distant past.
It is absolutely critical that your own financial plan is in good shape before saving or paying for a child’s education. At the end of the day, your child can take out student loans for an education but you cannot take out loans to fund your retirement.
Some Options for Saving
Prepaid tuition plans – This is a type of 529 plan that allows you to purchase “units” (credits) at participating colleges and universities.
Education savings plans – These 529 plans let you open an account to help you save for qualified educational expenses, which is broader than simply tuition and fees.
In a nutshell, with a 529 savings plan you can invest your after-tax money based on your comfort with risk and options available in the plan you select. When you are ready to withdraw, you can do it tax free (as long as it is for qualified expenses).
Additionally, many residents can 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, many 529 savings plans 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 your education financing goals through a savings account alone since the interest rate might not keep pace with the inflation of college expenses.
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.
If you decide to take a distribution Roth IRA funds before 59 ½ to pay for college expenses for your children, it gets more complicated. If you are withdrawing contributions, there would not be taxes or penalties.
If you are withdrawing any earnings then you may be able to avoid penalties if the distribution is used for qualified education expenses. Additionally, you might be able 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 you should consult a tax professional before making any decision.
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 scholarships.com/ and collegeboard.org .
Private Student Loans With SoFi
If you still need help funding your child’s education and they’ve exhausted their federal aid, you could take a look at private student loans. 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.
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SoFi Private Student Loans
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