Financial planning for college doesn’t have to be complicated as long as you know all available options. It’s important to remember that the right approach, extensive research, and creative exploration mean virtually any person can afford to go to college.
Planning for expenses and then learning about all the cost-cutting options, financial aid opportunities, and tax deductions can help both students and their parents get the best for their buck. This guide will help you get started on that journey.
Estimating and Understanding College Expenses
Before you dive into financial planning for college, you need to gain an in-depth understanding of what you are paying for. Tuition is the largest expense, but it’s hardly the only one.
1. Tuition and Fees
College tuition and fees are the number one education expenses to consider. The amount can change based on the academic program and the number of credit hours required.
The average college tuition for the 2020-2021 academic year in the United States is:
- Public university (in-state) — $9,687
- Public university (out-of-state) — $21,184
- Private college — $35,087
It’s worth noting that the difference between in-state and out-of-state tuition for public universities can be more than 100 percent. Private schools meanwhile tend to have more financial aid options available, which could be a deciding factor in your planning efforts.
It’s also possible to find a college that charges “comprehensive fees” that include tuition, fees, and room & board.
2. Room and Board
The second major expense is room and board. Higher education establishments usually provide a variety of dorm room options for on-campus students, as well as meal plans for those who live both on- and off-campus. The charge varies by the plan you choose.
If the student is planning to live off-campus, you have to factor in rent and meal costs. In some regions, it may be cheaper to live off-campus than pay room and board fees. The average annual room and board fee was $11,140 in the 2018-2019 academic year, for example, but in 12 states the monthly rent isn’t higher than $700, making the annual amount $8,400.
Some colleges make living on campus mandatory, so you have to factor in preset room and board expenses. These schools may also make freshmen sign up for a meal plan on-campus. The difference between room & board expenses for public and private colleges is usually minor.
3. Other Expenses
While tuition and room and board are the biggest parts of college education expenses, you need to consider the following costs as well:
- Books and supplies — the cost depends on the college you choose and the classes you take. The average is about $1,240.
- Personal expenses — internet connection, cell phone bills, entertainment, groceries, medications, etc. This figure varies greatly depending on the student’s needs, but the rough average is $3,000.
- Transportation — depending on a student’s transportation needs, this cost item can add up to $1,000.
In addition to the above-mentioned costs, you should also consider creating an emergency fund and discretionary account for the expenses that tend to accompany a student’s life in college.
Accounts to Set Up to Save for College
The average debt of college graduates is $30,000 in 2020, and it can take several years to pay that off. Early financial planning for college can help reduce this debt substantially.
1. A 529 College Plan
A 529 college plan, formally known as Qualified Tuition Program, is a special tax-advantaged savings account you can use to cover college expenses. The money kept in this account is free from federal income tax, and funds remain tax-free when you withdraw them for qualified college expenses.
These plans differ in each state. While you can take advantage of another state’s plan, in-state owners usually enjoy more benefits.
- Tax benefits
- Easy to manage
- Automatic investment options
- Unlimited contribution
- Money must be used for higher education (although some plans for elementary and high school education exist as well)
- May affect financial aid eligibility
- Limited investment options
2. Roth IRA
A Roth IRA is a special individual retirement account that allows you to make qualified tax-free withdrawals. Paying for higher education qualifies. This IRA account is similar to a traditional IRA, but Roth IRAs are funded by after-tax dollars and the contributions aren’t tax-deductible. You can withdraw up to the amount you contributed at any time without penalties.
- Flexibility (can be used for other purposes besides higher education)
- Doesn’t affect financial aid eligibility
- Numerous investment options
- Contribution limits and income restrictions
- If you withdraw money for any purpose, it counts as income on future Free Application for Federal Student Aid (FAFSA) applications.
- No state income tax deduction
3. Savings Bonds
Savings bonds are issued by the United States Department of Treasury to keep your money for a set period in exchange for a certain interest rate. Simply said, you are loaning the money to the government to get a little more back in the future when your child goes to college. U.S. savings bonds (Series EE and I) offer advantages to parents who want to save money for college, are virtually risk-free, and come with tax benefits for higher education when all requirements are met.
- Low-risk, guaranteed by the U.S. government
- Tax advantages
- Small impact on financial aid
- Small interest
- Not every owner is eligible for tax advantages
4. Custodial Accounts
A custodial savings account is a savings account that you set up for the child but have full control of until they reach legal age. You contribute to the account as you would to Roth IRA or 529 plan. An account manager invests the money for you.
- Easy to manage
- Easy to withdraw money at any time
- No penalties for withdrawals if used for a child’s needs
- No contribution limits
- No tax benefits
- Reduces eligibility for financial aid.
5. Education Savings Accounts (ESA)
An Education Savings Account (also known as Coverdell accounts) is very similar to the 529 plan. With an ESA, you have an opportunity to choose any kind of investment (stocks, mutual funds, bonds), which makes this option a more flexible choice.
- Federal tax benefits
- Flexibility (can be used for elementary and high school education)
- FDIC insurance coverage
- Income limitations
- Contribution limitations
- Non-qualified withdrawals are taxed
Teaching Children about Budgeting Early
While financial planning for college, it may be a good idea to set aside some time to teach your children about budgeting. This might include:
- Helping them understand what financial planning is all about and how important savings are for reducing student loan debt in the future.
- Explaining how having a part-time job can help earn extra cash for everyday expenses.
Working in high school can help children understand the importance of both time and money management, giving the necessary skills to hit everything on their to-do lists and cover personal expenses when they are in college.
College financial planning can be confusing, and it’s possible to make mistakes even with sufficient research. Working with a trusted wealth management professional can help you gain valuable assistance in estimating expenses and selecting the right savings approach.If you have any questions about financial planning for college, contact Bogart Wealth today. We are always here to help.