Smart Ways to Pay for College
Short of a home purchase, a college education is likely to be one of the biggest bills you’ll ever face. The College Board reports the average annual cost of attendance at a public university, including tuition and fees as well as room and board, is $18,391 for the 2013-14 school year. Attend a private college, and you’ll face a $40,917 bill. Add the fact that the average college graduate walks across the stage with a diploma and a student loan bill of more than $29,000, and parents and students alike face a perfect storm.
If there is one piece of advice I could give to new parents, it would be to start saving early. College is one of the most difficult life events to plan for, as parents have just 18 years to accumulate funds and four years (we hope!) to distribute the funds for college bills.
529 College Savings Plans are a great way to accumulate money for college. Funds grow tax-deferred, and distributions are tax-free when used for qualified education expenses. Anyone can contribute to these plans, including parents and grandparents. Many states offer additional tax benefits, such as matching grants or state income tax deductions.
Only Four Years
Limiting the college experience to four years can reduce the overall cost. Poor planning on required courses or switching majors can add to the bill. Take some exploratory courses early on, and then stick with your major. Many employers care more about the skills and experiences you’ve developed than about your major.
Better yet, see if you can build up some college credits through Advanced Placement tests or by taking a summer class or two online or at a local community college to reduce your costs and ensure you will be done in four years.
Take Advantage of Uncle Sam
Be sure you’re not missing out on tax breaks when the bills start coming. The American Opportunity Tax Credit is worth up to $2,500 on your 2013 return. If you use a 529 plan, it comes with tax breaks, so you can’t use that account to pay the same expenses you use to claim the credit. You may also be able to deduct any student loan interest paid during the year. Subject to income limits, this could reduce your adjusted gross income by up to $2,500.
Get creative when it comes to paying for college. Many students today attend community college for the first two years and then transfer to a university to finish their degree. Doing so can cut the tuition bill in half or more.
Consider prepaying your future tuition bills. Many colleges give parents the chance to save a bundle by prepaying the bill. If your favorite college doesn’t offer this program, see if it belongs to the Private College 529. You might be able to save 10 percent or more by paying some of those future bills today.
Lastly, there’s nothing wrong with students having some “skin in the game.” Whether it’s a summer job, working a few hours during the school year or the college work-study program, it’s all right for students to help with the bills.
Go Easy on Yourself
Lastly, don’t be too hard on yourself if your student graduates with some loan debt. Research demonstrates the value of a college degree over a lifetime of work. Looked at in that light, the cost of a college education, while a huge investment, can pay a lifetime of dividends.
With a little planning, you’ll have the confidence and financial resources to deal with those bills when they come. People who reach their financial goals rarely go it alone. To learn more about college planning, consult your financial adviser.