College is expensive, with the yearly cost of attendance at some private schools now topping $75,000. Looking at these numbers, you may wonder how you will ever possibly afford to send your kids to college.
But before you get too disheartened, it’s important to understand that a college’s published “sticker price” is often very different from what you actually have to pay (known as the net price). What’s more, just putting a small amount of money aside each month in a college fund can add up to a significant sum over time, especially if you take advantage of a tax-advantaged college savings account.
Read on to learn key things about how to save for college — from estimating how much you need to set aside to picking the right college saving fund.
Determining the Cost of College for Your Children
Tuition costs vary widely, depending 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 college tuition costs for the 2022-23 school year were:
• $10,940: public four-year in-state (a 1.8% increase from 2021-21)
• $28,240: public four-year out-of-state (a 2.2% increase from 2021-22)
• $39,400 : private nonprofit four-year (a 3.5% increase from 2021-22)
• $3,860: public two-year in-district (a 1.6% increase from 2021-22)
The College Board also studied the annual, inflation-adjusted change in college tuition and fees over the last decade:
• -1%: four-year public schools
• -4%: two-year public schools
• +6%: four-year private (nonprofit) schools
If your kids are young, you may wonder how much college will cost when it’s time for them to head off. Fortunately, there are many online calculators that can help you figure this out, taking factors like your child’s age, the type of school you expect your child to attend, and the expected rise in the cost of college into account.
💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.
Net Price vs. Sticker Price
Every college and university, private or public, lists a sticker price, which is also known as the cost of attendance (COA). This price includes tuition, fees, room and board, books, supplies, and miscellaneous expenses.
The net price, on the other hand, is what a student would actually pay, after factoring in any financial aid provided by the college and the federal government.
Financial aid is based on your family’s income, as well as the student’s academic achievement. Aid is offered in the form of grants, scholarships, work-study, and sometimes federal student loans. Schools offer aid based on financial need, a student’s “merit,” or a combination.
When you fill out the Free Application for Federal Student Aid (FAFSA), you will receive a Student Aid Index, or SAI. (Previously, this was called the Estimated Family Contribution, or EFC.) Colleges use this number to determine the amount of financial aid they award to accepted students. Typically, colleges come up with a financial aid package to help bridge the gap between the school’s sticker price and what your family can afford to pay.
Indeed, sometimes colleges with the highest sticker price end up costing less than a college with a much lower sticker price.
Recommended: How to Start Saving for Your Child’s College Tuition
Using a Net Price Calculator
Fortunately, you can get an idea of what the net price will be for a particular college before you apply by using the government’s net price calculator. This tool can help students and their families get a better idea of the cost of college, after subtracting scholarships, grants, and other financial aid.
Keep in mind, though, that the 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?
Generally, the sooner the better. In fact, it can be wise to set up and start making small monthly contributions to a college savings fund soon after your child is born.
For some familes, however, it may not be possible to start saving that early. It’s equally important to pay attention to your other expenses and family’s needs. For example, you may want to prioritize building an emergency and paying off expensive credit card debt over saving for college. It’s also a good idea to make sure you’re on track with retirement savings. At the end of the day, students are able to get loans for an education but it’s not possible to take out loans to fund retirement.
Some Options for Saving
529 Plan
A 529 education savings plan is an investment account that can be used to save for the beneficiary’s qualified education expenses. The funds can be used to pay for higher education or private elementary or high schools. A 529 plan allows your savings to grow tax-free, and some states even offer a tax deduction on your contributions.
All 529 plans are set up at the state level. However, you don’t have to be a resident of a particular state to enroll in its plan.
If your child decides not to go to school, it’s possible to roll the account over into the name of another family member. If the funds aren’t used for education-related expenses, there may be taxes and penalties.
Family members and friends can also contribute to a child’s college savings plan. They may choose to make deposits to an existing 529 account or set up one themselves, naming a beneficiary of their choice.
Some 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
You can also save for your child’s college tuition using a savings account at a traditional bank, credit union, or online bank. Just keep in mind that interest rates, even for high-yield savings accounts, tend to be relatively low. Plus, savings accounts don’t offer the tax advantages you can get with some other college savings vehicles.
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
Although generally used for retirement savings, a Roth IRA can be used to pay for the cost of college. Contributions to a Roth IRA are made with after-tax dollars but earnings grow tax-free.
Generally, to withdraw the earnings from an IRA without paying a penalty (or taxes), the account holder needs to be at least 59 ½ years old. However, if you made the first contribution to your Roth IRA at least five years before, you can also withdraw the growth penalty-free for qualified education expenses, including tuition, books, and supplies.
Keep in mind that, while there may not be an early withdrawal fee, the earnings withdrawn may still be subject to income tax.
Other Options to Pay for College
Sometimes saving alone isn’t enough to cover the cost of college. In that case, there are other funding options available that could help students and their families pay for college.
Private Scholarships
Scholarships are essential free money for college because you don’t have to pay them back. Scholarships are typically merit-based and are offered through a variety of organizations and institutions, including nonprofits, corporations, and even directly from universities and colleges. In some cases, scholarships are awarded on the basis of nationality, ethnicity, or economic need. There are a number of searchable databases that compile different scholarship opportunities.
Federal Financial Aid
When you complete the FAFSA each year, you will become eligible for federal financial aid. This can include scholarships, grants, work-study, and federal student loans (which may be subsidized or unsubsidized).
Private Student Loans
If savings and financial aid aren’t enough to cover the full cost of college, you can fill in gaps using private student loans. These are available through private lenders, including banks, credit unions, and online lenders.
Loan limits vary from lender to lender, but you can often get up to the total cost of attendance, which gives you more borrowing power than with the federal government. Interest rates vary depending on the lender. Generally, borrowers (or cosigners) who have strong credit qualify for the lowest rates.
Keep in mind, though, that private loans may not offer the borrower protections — like income-based repayment plans and deferment or forbearance — that automatically come with federal student loans.
💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.
The Takeaway
College tuition can be a daunting expense. Setting up a dedicated account to save for college tuition can help make the process much more manageable. 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.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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