Like any parent, you want what’s best for your kids. This desire might leave you wondering: “How should I pay for my child’s college?” 

As of January 2022, the average cost of college in the United States is $35,331, when considering tuition, books, supplies and daily living expenses. If you consider all the costs, some experts say that the cost of a bachelor’s degree could exceed $400,000.¹ That’s significantly higher than most of our clients expect when we first discuss college planning – and requires a long-term plan if you’re looking to set your children up for success. Here’s how you can start.

When Should I Start Thinking About Paying for My Child’s College?

Have you or your partner recently received a positive pregnancy test? Congratulations! Now is the best time to start thinking about college.

Joking aside, you should start considering your child’s college savings the moment they’re born. College tuition rates are increasing dramatically, and some experts estimate³ that in 18 years, a college degree could cost as much as $550,000.

Once you start saving, revisit your plan every year, and make adjustments accordingly. This reassessment becomes all of the more important as your child reaches their teen years and you have a better idea of their eligibility for athletic or academic scholarships.

What Should I Consider When Paying for My Child’s College?

Basically, your plan comes down to the amount of money your son or daughter will need for college. There are three general things you might consider:

Public vs. Private College

The cost of tuition varies widely between public and private colleges, and in-state tuition provides the cheapest plan of all. Here are the average yearly costs, on average, for college cost of attendance as of January, 2022¹:

• • Private, nonprofit: $53,217

• • Private, for-profit: $35,125

• • Public, out-of-state: $43,161

• • Public, in-state: $25,487

While a state school might seem an obvious choice, in-state tuition has risen⁴ by 211% at public universities, which may mean the gap between public and private schools could narrow by the time your child graduates from high school.

Community College vs. 4-Year College

Community colleges are typically cheaper than public universities. Students may save money by spending a year or two at a community college then transferring to a 4-year college. This approach may also give students extra time to hone their educational goals and choose a school accordingly.

Merit-Based Aid

One way to quickly decrease the cost of tuition is through merit-based aid. This is a form of financial aid that is based on academic or special-interest merit, and can cover a few hundred dollars to the full tuition amount annually. On average, merit-based awards granted $11,287 per year to recipients in the 2019-2020 school year⁵. A strong focus on your child’s grades in high school could be a prudent way to decrease overall college costs in the long run.

Total vs. Partial Funding

When parents ask: “How should I pay for my child’s college?” it’s important to remember that you might not need to pay for the whole thing. While this is certainly an option, some parents pay for a portion, then find ways to cover the rest through:

• • Student loans

• • Income-based loans

• • Scholarships

Additionally, high school students can start working to save money toward school expenses. Sure, their summer job won’t cover the price of tuition, but it can contribute toward books or meals. Plus, it may give them greater ownership over their education.

What Are the Best Methods for Paying for My Child’s College?

We recommend that parents adopt two strategies to save for their children’s education:

529 Plan

A 529 plan (also called a qualified tuition plan) is an investment account specifically designed to pay for educational expenses, including your children’s college. This investment vehicle allows you to withdraw your money tax-free so long as the funds contribute to qualified higher education expenses.

There are 50 different 529 plans — one for each state. You don’t have to use the plan from your state, though you may receive additional income tax incentives when you use your own state’s plan.

But don’t put all of your investment into a 529 plan. Even if you plan on funding your children’s education 100%, only 50% to 75% of your savings should go into a 529 plan.

Non-Qualified Investments

Parents can also save for college through non-qualified investments, meaning investment vehicles that don’t offer tax-deferred growth. While there are a variety of options here, we are often suggesting utilizing a diversified mutual fund portfolio that can be accessed at any time, for any reason.  

A combination of 529 plans (that only be used for education) and non-qualified investments can offer more flexibility to your overall strategy. 

Bottom Line: How Should I Pay for My Child’s College?

Earlier, we joked that you should start saving as soon as you receive a positive pregnancy test. But that’s actually not the worst idea. 

Choosing wise investments today can help pay tuition costs tomorrow, especially as they continue to rise. When you’re ready to consider planning for your children’s education, contact one of our financial advisors. Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.

 

¹ Source: https://educationdata.org/average-cost-of-college

² Source: https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-how-student-loan-borrowing-has-risen-in-10-years 

³ Source: https://www.cnbc.com/2017/03/17/in-18-years-a-college-degree-could-cost-about-500000.html

⁴ Source: https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-09-20/see-20-years-of-tuition-growth-at-national-universities 

⁵ Source: https://www.usnews.com/education/best-colleges/paying-for-college/slideshows/things-to-know-about-merit-aid-scholarships

4641661/DOFU 4-2022

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