Let’s face it. College costs are on the rise. And if you plan to pay for your children’s college education, knowing and planning how you will pay for it is as important as planning for retirement. The average cost to attend a public university in Ohio exceeds $20,000 per year, while individuals attending private colleges can expect to pay over $40,000 per year. These costs include tuition, fees, books, room and board, and personal spending money.
If you had to fully fund these costs without the help of student loans, grants, scholarships, or work-study programs, you could find yourself paying between $80,000 and $160,000 over the course of four years. And that’s assuming your child completes the degree program in four years and tuition rates remain the same! To help ease the burden of higher education costs there are several ways you can begin to plan (if you haven’t started already).
Easing The Burden of Higher Education Costs
- Invest. As with retirement planning, starting early will help tremendously. By starting early, you can invest in growth stocks and mutual funds that have the potential for better returns. However, you should be cautious of the risks and rewards of the stock market and you will want to become more conservative as your child approaches college age.
- Save. There are at least three ways you can start setting aside money to pay for future college costs that may also provide you with a tax benefit. Here are some savings ideas:
- Government savings bonds (series EE) are not subject to state tax and are federally income tax free, as well as when used to pay qualified higher education expenses and if certain guidelines are met.
- A qualified tuition program (QTP) (College 529 plan) allows you to purchase prepaid tuition at today’s rates and contributions may be deductible for state income tax purposes.
- Education savings account (ESA) (Coverdell ESA or Education IRA) contributions can be made on an annual basis. Adjusted gross income limitations may apply, and earnings are tax-free if used to fund qualified education costs.
- Manage Costs. During your child’s senior year of high school, encourage him or her to apply for as many scholarships as possible. Completing the applications may take some time, and you may need to meet certain qualifying criteria. But if your child is selected to receive the scholarship, the money will help offset the costs. There are also federal and state grants available that don’t have to be repaid, and as with scholarships, the application may take some time, and contain certain qualifying criteria – but the reward is well worth it.
Your child may also want to consider Advanced Placement (AP) courses while in high school to earn college credit, attend a local community college for the first two years of their degree program, live at home while attending college, or participate in work-study programs at their college. All of these options may help you cut any college costs you incur.
- Borrow. Consider federal and private loan options. The federal loan process starts with completing the Free Application for Federal Student Aid (FAFSA). Completing the FAFSA will require collecting certain information upfront, but is not as scary as it looks.
Upon submission and review of the FAFSA, you will be notified of your options to receive federal loans. There are many federal loans available including the Direct Unsubsidized Loan for undergraduates and graduates, the Direct PLUS loan for graduate and professional students, and the Federal Perkins Loan for those with exceptional need.
After you have considered and exhausted the federal programs and find yourself in need of additional funding, you may want to consider a private student loan. These loans are offered by banks and may carry a higher interest rate than the federal loans, less generous repayment terms, and are approved based on credit worthiness of the borrower(s). Of course you could also take out a home equity loan as well, which should carry a favorable rate and may allow you to deduct from taxes the interest as well.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 4/9/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.