Key Questions To Help You Get Started on Funding Your Kids' Education
As soon as children are born, parents tend to start fretting about how they'll pay for their college education. Here are some frequently asked questions parents have about saving for college – and what you can do to get started right now.
How Much Does a College Education Cost Today?
According to the College Board's Trends in College Pricing and Student Aid, average annual total expenses in 2021-22, including tuition, fees, room and board, books, supplies, transportation, and other expenses were:
- $27,330 for public four-year in-state students
- $44,150 for public four-year out-of-state students
- $55,800 for private nonprofit four-year students
How Is Need-Based Financial Aid Determined?
Colleges award need-based grants based entirely on their assessment of how much the student's family is able to pay. While there's no hard-and-fast cutoff for need-based aid, at private colleges, you're unlikely to qualify for aid once your parents' income surpasses about $350,000. One bit of relief: Having multiple students in college at the same time is a big factor in the formula.
Filing for the Free Application for Federal Student Aid (FAFSA) should be your first step toward receiving federal financial aid. If you don't apply, you won't have access to any type of loans, grants or work-study programs. Some schools may require you to fill out the similar College Scholarship Service (CSS) Profile.
Are There Tax Credits I Can Get for College Tuition?
Yes. To take one example, the American Opportunity Tax Credit allows a credit of 100% for the first $2,000 of tuition costs, plus an additional 25% of the second $2,000, for a maximum annual credit of $2,500 per student. You're eligible for this credit if your family's adjusted gross income is $180,000 or less ($90,000 or less for single filers). Check out IRS Publication 970 for more opportunities for education tax savings, although keep in mind, you can only use one of these tax credits at a time; you can't double-dip.
Will My Savings Hurt My Child's Chance for Financial Aid?
It depends on the type of savings. Your retirement assets such as IRAs or 401(k)s, your insurance policies and annuities, and your primary residence won't count against you when you file for the FAFSA. Those schools that use the CSS Profile may require you to dive deeper into your financials, and may also require you to report your primary home as an asset.
Should All the Recent Talk Around Loan Forgiveness Change My Approach to Education Funding?
It's important to remember that the discussion of loan forgiveness remains just a discussion. Until any legislation is enacted, the prudent course is to assume that any loans will need to be repaid. At any rate, there will always be significant costs associated with higher education, so the earlier you get started planning, the better.
What Are Some Other Ways I Can Build Up College Savings?
- Look at temporary or seasonal expenses that your child might grow out of as he or she gets older, like child care, uniforms or equipment for sports teams. When these expenses stop, add those payments to your college savings.
- Commit part of any future salary increases to your college fund.
- Encourage those who give gifts to your child to instead make a check out to your college savings fund.
- There are a handful of vehicles to help you save for education, the best known being the 529 college savings plan. A 529 plan grows tax-deferred and comes out tax free if used towards a qualified education expense. Your state may also offer a state tax benefit for investing in their in-state plan.
- Finally, consider having a conversation with your child as early as possible so they understand the financial costs of going to college and can get started on choosing a college that fits their career aspirations, personality and interests. Getting your child involved right away allows them to have some skin in the game.
Planning for college is a long-term endeavor that becomes much easier with careful planning. Talk to your Baird Financial Advisor about any questions you have regarding college savings strategies.
Editor's Note: This article was originally published November 2020 and was updated April 2022 with more current information.
Investors should consider the investment objectives, risks, charges and expenses associated with a 529 plan before investing. This and other information is available in a Plan's official statement. The official statement should be read carefully before investing.
Depending on your state of residence, there may be an in-state plan that provides tax and other benefits such as financial aid, scholarships and creditor protection that are not available through an out-of-state plan. Before investing in any state's 529 plan, you should consult your tax advisor.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.