Paying for College: A Parent's Guide

By Jody McMaster · July 20, 2023 · 9 minute read

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Paying for College: A Parent's Guide

Many parents want to do whatever they can to help pay for their child’s higher education, which can be quite expensive. In-state education can top $100,000 for four years, and a private education can total $224,360 on average, according to figures from the Education Data Initiative.

Starting to plan and save early and consistently can be vital. But knowing how much to save and where to stash those funds, plus pay for any balance due, is equally important.

Need guidance? Here, what parents need to know about paying for their child’s college education.

How Much Will I Need to Save?

The answer to this question is subjective. Do you plan to try to cover 100% of your child’s college costs, or will student loans, if needed, be palatable? Will your child likely qualify for need-based or merit aid? Might your high achiever be eligible for a college that meets some or all of demonstrated need?

Have you carved out your own retirement savings plan and an emergency fund, and have you focused on paying down your own debt? It’s smart financial planning to get your house in order first, so you can save for your offspring’s college.

The cost of attendance, or “sticker price,” on every college website that estimates the total cost of a year of school can cause, well, sticker shock. But most students do not pay sticker price. They pay the net price, which is that number minus scholarships, grants, and financial aid.

The College Board reports that the average published tuition and fees for full-time students for 2022-23 were:

•   Public four-year college, in-state student: $10,950

•   Public four-year college, out-of-state student: $28,240

•   Private nonprofit four-year college, any student: $39,400.

Remember that the above numbers cite tuition and fees, not the total cost of attendance, which also includes the estimated annual cost of room and board, books, supplies, transportation, loan fees, miscellaneous expenses (including for a personal computer), and eligible study-abroad programs.

The upshot: Anticipating the cost of attendance of various colleges, your family’s eligibility for merit and need-based aid, and borrowing tolerance can help you prepare.

If you put a number on a savings target, another key question is: How can I start saving for college?

What Are Some Strategies for Saving?

Here are a few options to consider:

Automating savings. You could set up automatic transfers to a designated college savings account, so you won’t even have to think about it. You can transfer from your checking account or, if it’s an option, opt to direct deposit a portion of your paycheck directly to your savings account.

Putting windfalls to work. Another way to boost savings comes from the planned and unplanned windfalls in life. Getting a tax refund or receiving an inheritance? Keeping an eye out for unexpected money can help you achieve your savings goals.

Pruning expenses. If you haven’t already trimmed your expenses, you can use the natural course of time to turn expenses into savings. For example, once your child no longer needs diapers, you can put that cost toward college savings. When they no longer need daycare, you could funnel what you were paying into your account. If piano lessons end, it’s yet another chance to increase how much you can save.

Finding scholarship matches. Once children get closer to high school graduation, you can help them find scholarships. FastWeb and are two popular sites among many that will help you search for opportunities. Many allow you to set up a profile for your child that may include interests, intended majors, and even preferred schools — data points that will be used to help match your child with scholarships.

It’s usually more cost-effective to save than borrow, of course. Every dollar you borrow can cost you more than that dollar once you add interest.

Many parents use a mix of sources to fund their children’s education. For example, you could save a third of your target, pay a third during your child’s time in college, and borrow the last third.

💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

Which Savings Plan Is Right for Me?

If you have your target goal and a plan to make regular contributions, you’re ready to weigh which investment vehicles will fit your needs. Here are some common savings tools.

529 Plans

The 529 college savings plan is a tax-advantaged account to save for higher education costs, and it has become popular with parents saving for college. Anyone, even non-family members, can set one up and make contributions on behalf of a beneficiary. Some details:

•   Contributions to 529s are made with after-tax dollars, but they grow tax-free, and capital gains are tax-free as long as withdrawals are used to pay for qualified education expenses.

•   Any withdrawals that are not used for higher education expenses may be subject to penalties and taxes.

•   If your child doesn’t go to college, the funds still need to be spent on education to avoid taxes and penalties. But you have the ability to change the beneficiary of a 529 account to another family member.

This means that if your oldest child does not use the funds for college, you can change the beneficiary on the 529 to a sibling or even a family member in the next generation.

•   If your child receives a scholarship for college, you can withdraw the amount of the scholarship from the 529 plan penalty-free. If you decide to withdraw it for another purpose, you’ll pay a 10% penalty, plus regular income taxes.

•   Annual contributions to a 529 plan are not limited, but any amount you give the beneficiary will be part of your annual $17,000 gift tax exclusion. The IRS will let you (and your spouse, if you elect to split gifts) make five years of contributions at once without paying gift taxes.

•   Many states offer these plans, so you’ll want to start by finding out if your state offers any tax incentives to participate in your own state’s sponsored plan. If you discover that your state does not offer additional tax benefits for contributions, you can shop around for the lowest fees.

Then there are 529 prepaid tuition plans , offered by a dwindling number of states, that allow parents, grandparents, and others to prepay tuition and mandatory fees at today’s rates at eligible colleges and universities.

•   Currently, nine states offer them: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington.

•   Most state prepaid tuition plans require you or your child to be a resident of the state offering the plan when you apply. Most allow the funding to be transferred to a sibling.

•   Qualified distributions from prepaid 529 plans are exempt from federal income taxes and might also be exempt from state and local taxes.

•   The Private College 529, not run by a state, offers guaranteed prepaid tuition at many participating colleges and universities, with no residency requirements.

Coverdell Education Savings Account

A Coverdell education savings account can also be used to pay for qualified education expenses.

The annual contribution limit is $2,000. Contributions are made with after-tax dollars, but they grow tax-free, and withdrawals for qualified expenses are tax-free.

The account is limited to certain incomes. The current limit is a modified adjusted gross income (MAGI) over $110,000 per person or $220,000 if filing jointly.

💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

UTMA and UGMA Accounts

A Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) custodial account can be set up to pay any expense that benefits a minor. Here’s more intel on how these work:

•   When your child reaches the age of majority, 18 or 21, depending on the state, they will be able to use the money for whatever they want, so many parents are wary of using these to plan for college. (However, the funds could become an investment plan for your child if they didn’t go to college.)

•   The flip side is your child won’t be limited to just paying for education expenses and can use the money for living arrangements, a car, or other necessary purchases.

•   There are no contribution limits for UTMA and UGMA accounts, and they can be funded with any combination of cash and investments. Annual gift tax exclusions apply.

•   Because contributions are made with after-tax dollars, there are no taxes on withdrawals, but there may be taxes on capital gains.

What About Student Loans?

Students can have access to scholarships and grants, which can help make college more affordable. In addition, your student may have to take out federal student loans to make it to graduation day. You can also shoulder some of the load.

Parent PLUS loans can be one way to help your child afford college. They are student loans offered by the U.S. Department of Education, and parents become the borrower. You can borrow up to the amount of education expenses not covered by other financial aid. It’s easier to qualify if you don’t have a good credit history.

Parent PLUS loans have a fixed interest rate, currently 8.05%, with a typical term of 10 years that may be extended to 25 years. However, unlike federal student loans, Parent PLUS Loans come with a fairly high origination fee — it’s currently 4.228%.

Even with savings, federal student loans, grants, and scholarships, your child may still have unmet needs. Private student loans, offered by private lenders, are often used to fill those gaps.

•   Depending on your situation, student loan refinancing can also lower your monthly payment. Many online lenders consider a variety of factors when determining your eligibility and loan terms, however, including your educational background, earning potential, credit score, and other factors. And if you’re lowering your monthly payment by extending your loan term, you may pay more interest over the life of the loan.

•   With private parent student loans, you, the parent, take responsibility for the loan. Another option can be undergrad private student loans that allow a cosigner. If you cosign, you and the student are responsible for the loan.

•   It’s important to know that federal student loans come with benefits, including income-driven repayment options and student loan forgiveness, that private lenders do not offer.

Recommended: Student Loans Guide

The Takeaway

Paying for a child’s college education involves two key things: saving early and consistently. Most students will still end up borrowing in order to pay for the many expenses of higher education.

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.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

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