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How to pay for college

Planning and saving for a child’s college education funding is one of the bigger investments many will make over the course of their lifetime. An Ameriprise financial advisor can help you evaluate your options as you financially plan for college, while also staying on track for other goals such as saving for retirement.

College is an exciting chapter and a significant milestone in life. Of course, going to college does come with a price tag – one that is only getting more expensive each year. Here are some options to consider when saving and paying for a college education.

In this article:

Understand the cost of college education

When planning for the cost of a college education, it’s a good idea to keep an open mind and consider all options available for your family. Would your child consider attending a public university versus a private one to reduce costs? Are they willing to go a community college for one or two years, then transfer the credits to their dream school? 

College costs generally increase at about twice the rate of inflation, from 5 percent to 8 percent per year. And these costs are already steep. According to, the average tuition and fees for 2019 – 2020 for students are:

Type of college or university Cost per year1
Four-year public college/university in state $10,440
Four-year public college/university out of state $26,820
Four-year private college/university $36,880


In addition, you may have to pay for room and board. In 2019 - 2020, average room and board costs for a public four-year college or university full time is $11,510.

Several other factors may also affect the cost of an education:

  • Student's age
  • Academic record
  • Financial aid opportunities (federal, state)
  • Scholarships
  • Degree goal
  • Housing costs (on- or off-campus)
  • Military service

To find out how much you may need to save for a child’s college expenses, use this college savings calculator

529 college savings plans

A 529 savings plan is a tax-advantaged savings account that is designed to be used towards the beneficiary’s education costs. Contributions made to a 529 savings plan have already been taxed, and the money can grow and be withdrawn tax-free if it is put towards education expenses such as tuition, books, or room and board. While there are no annual limits for how much you can contribute to a 529 plan, there are maximum lifetime limits per beneficiary that vary by state and range from $235,000 to $529,000.

Coverdell education savings accounts

A Coverdell education savings account (ESA), formerly known as the Education IRA, is like a 529 savings plan in that the contributions can grow tax-free, but there are a few differences. With a Coverdell ESA, families can only contribute a maximum of $2,000 per year per child, and the amount must be used by the time the beneficiary is 30 years old. You will also usually have more investing options than you would with a typical savings account.  

Financial aid 

For most students, having some type of financial aid to help pay for college is an important resource. When you and your child fill out the Free Application for Federal Student Aid (FAFSA), you will get an understanding of what aid you may qualify for, even before your child has made a decision on which university they would like to attend. These are some of the most common forms of financial aid:

Student loans

If you decide to apply for financial aid, you will likely be offered federal student loans in the aid package. Before your child take out any loans, evaluate the type of loans and the terms and conditions. Student loans typically fall into two categories: federal and private student loans. 

  • Federal student loans are loans provided to students by the federal government. With federal student loans, payments aren’t required until after you graduate, and interest rates are fixed. 
  • Private loans tend to come from banks or credit unions. While private loans may offer more in aid, their interest rates are usually higher, payments may begin while your child is still in school. 

Scholarships and grants

Scholarships and grants may be awarded by a college as part of a financial aid package, or they may be applied for separately. Scholarships tend to be merit-based – meaning they are awarded to students based on achievements, such as academics or athletics. Grants are needs-based according to your family’s economic situation. Both are competitive, and you may need to do some research to find them but it can pay off in the long run.

Work-study jobs

Federal work-study jobs provide part-time work for students while they are enrolled in school. If this is included in a financial package, work-study allows your child to work on-campus jobs around a flexible schedule. Unlike a part-time job, your child is not required to report their work-study earnings on the FAFSA, and therefore will not impact the following year’s financial aid. 

Home equity loans

If you own your home, you may be able to use your home equity to pay for your child’s tuition. A home equity loan may be less expensive than other types of loans, and the interest you pay is tax deductible. However, these loans don’t typically offer flexibility if your financial circumstances should change, so plan to discuss the pros and cons of this option with your Ameriprise financial advisor.

Life insurance

Cash value life insurance is another option that some parents choose as a way to fund education expenses. 

With a permanent life insurance policy, a portion of your premiums go toward the death benefit, while another portion is allocated into a cash value account. You can take out a loan against your cash value (when properly structured2), but it will likely reduce the death benefit. The loan against the policy allows the policy owner to use that loan (i.e., cash-value) however they would like such as paying college expenses.  In addition, the cash value is not calculated into a student’s financial aid package. 

However, a life insurance policy may not be the most affordable option for saving, as it can take time for the cash value to outgrow the cost of premiums, and annual expenses and fees for maintaining the accounts can add up.

Retirement accounts

While some parents choose to utilize their retirement accounts to contribute to their children’s college costs, you’ll want to consider the ramifications prior to going this route. If you withdraw from a retirement account like a 401(k) or a Roth IRA, to fund your child’s college costs,  you may be subject to additional costs, such as income tax or early withdrawal fees and you are impacting your future retirement income.

Talk to an advisor

An Ameriprise financial advisor can help you evaluate your college financial planning options and sort through many of the financial considerations as you plan and save for educational expenses.

To find out more about the right education savings plan for you, contact an Ameriprise financial advisor.

Or, request an appointment online to speak with an advisor.


At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

If you know someone who could benefit from a conversation, please refer me.

Background and qualification information is available at FINRA's BrokerCheck website.

1Accessing policy cash value through loans and surrenders may cause a permanent reduction of policy cash values and death benefit and negate any guarantees against lapse. The amount that can be borrowed or surrendered will be affected by the surrender charges applicable to the policy. Loans may be subject to interest charges. Although loans are generally not taxable, there may be tax consequences if the policy lapses or is surrendered with a loan (even as part of a 1035 exchange). It is possible that the amount of taxable income generated at the lapse or surrender of a policy with a loan may exceed the actual amount of cash received. Surrenders are generally taxable to the extent they exceed basis in the policy. If the policy is a modified endowment contract (MEC), pre-death distributions, including loans, from the policy are taxed on an income-first basis, and there may also be a 10% federal income tax penalty for distributions prior to age 59-1/2.
Ameriprise Financial cannot guarantee future financial results.
Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their, or their designated beneficiary(s) home state offers any state tax or other state benefits such as financial aid, scholarship funds or protection from creditors that are only available for investments in such state’s qualified tuition program.
The earnings portion of money withdrawn from a 529 plan that is not spent on eligible expenses will be subject to income tax, an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
By clicking the links to college data or FAFSA, you will leave  The included hyperlinks are provided for informational purposes only and are not an indication or endorsement of the content therein or affiliation with respect to the linked site. Be aware that the linked site will be subject to rules, regulation, and privacy and security provisions that are separate, and may differ, from Ameriprise Financial.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.

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