Saving for education

Are you planning to help your children, grandchildren or another child close to you with their education expenses? Or thinking of taking classes yourself? Only two in five families have a plan for how to afford all two or four years of college, according to a new Sallie Mae report, “How America Pays for College 2016”. The tips outlined below may help you better plan to achieve this goal.

Determine your educational needs

Creating a college savings plan begins by defining your educational needs and preferences. Answering these questions can help you get started:

  • Would you prefer a private or a public school?
  • What will it cost? How much is too much? Make sure you take college inflation rates into account.
  • How long will it take, or how long do you have, to save?

Once you’ve determined your preferences, it’s important to have a solid understanding of the different college expenses you’ll need to plan for.

Understand the cost of college education

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 collegedata.com, the average tuition and fees for 2016 – 2017 for students are:

Type of college or university Cost per year**
Four-year public college/university in state $9,650
Four-year public college/university out of state $24,930
Four-year private college/university $33,480

**In addition, you may have to pay for room and board. In 2016 - 2017, average room and board costs for a public four-year college or university full time is $10,440.

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

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

Assess college savings plan options

The next step involves researching the different types of college savings plans available so that you can find an option that works best for you.

  • Custodial accounts (UTMA). This option allows you to make an irrevocable gift to a minor to an account that your child ultimately controls when he or she turns 18 or 21 (depending on state law). He or she can use the funds for tuition and other expenses, but the dollars do not have to be used for education.
  • 529 college savings plans529 plans are generally sponsored by states, state agencies or educational institutions for qualified college tuition and expenses. These investment plans stay under your control and offer certain tax and contribution advantages.
  • Coverdell Education Savings Account (CESA). You can contribute to this investment account only until children turn 18 unless the child is a special needs beneficiary. This type of account can be used for elementary, secondary and college expenses and tuition. It includes tax benefits but has a maximum contribution limit of $2,000 per year.
  • Traditional/Roth IRAs. Penalty-free distributions are allowed from IRAs for eligible educational expenses for you, your children and your grandchildren. IRAs are not counted as assets for financial aid calculations, but withdrawals are considered financial aid income for parents (income taxes may apply to IRA and Roth IRA withdrawals).

Consider other ways to pay for college

In addition to savings, current income and borrowing, there are other ways to finance higher education including:

  • Financial aid from federal and state governments
  • Student work-study programs or a part-time jobs 
  • Loans from private, federal and college sources
  • Scholarships and grants from different sources
  • Family gifts
  • Borrowing from home equity or retirement account

Borrowing from your home equity or retirement account — or reducing your retirement savings contributions to help pay for college — is an option. However, doing so could mean you'll need to work longer than you planned before retiring. Encouraging your child to take out a loan for college, such as a Stafford loan, may mean that he or she will graduate with some debt. But remember that he or she will also have a much longer period of time to pay off the loan.

Speak with a financial advisor about your options

As you explore college financing options and determine which program, or combination of programs, will best meet your needs, you may wish to talk to a financial advisor to guide you through the finer points such as:

  • How does saving for education fit into your financial life?
  • How can you resolve competing needs to save for retirement and a child's education?
  • What calculations are used by institutions in determining financial need?
  • How will a college savings plan affect your taxes, financial aid eligibility and tax credits?
  • What investment options do you have based on your risk tolerance and when the funds will be needed?
  • Which currently held funds are accessible and what are the penalties for early withdrawal?

We're here to help you with a college savings plan

If saving for college is an important financial goal for your family, talk to an Ameriprise financial advisor about how you might start a college savings plan for yourself, your children, grandchildren or other children close to you.