Saving for College
Funding a college education is a heavy lift, but there are techniques to make the job easier. The same applies to paying off college debt. Learn to minimize or even eliminate much of what you owe.
Saving for College
How much on average do people save for college?
While it’s difficult to determine the average amount actually saved for college, since savings can be spread across multiple accounts and plans, the size of the mean college budget can offer some insight into the ideal savings target. According to the College Board, the average estimated budget (including tuition and fees, room and board, books and other school supplies, transportation, etc.) in 2021–22 for full-time undergraduate students in public two-year in-district colleges was $18,830. The average budget increased to $27,330 for public four-year in-state colleges, followed by $44,150 for public four-year out-of-state colleges and $55,800 for private nonprofit four-year colleges.Learn More: Understanding Your Financial Aid Award Letter
What is a good amount to save for college?
The amount of money you should expect to save for college will vary based on your family income, eligibility for financial aid, and the annual cost of attendance (COA) for the kinds of schools you or your child are considering attending. All U.S. colleges and universities are required by the federal government to publish their annual COA estimates, which include tuition and fees, room and board, books and supplies, transportation, and other expenses. According to the College Board, the average published price for just tuition, fees, as well as room and board in 2021–22 for public two-year in-district colleges, public four-year in-state colleges, public four-year out-of-state colleges, and private nonprofit four-year colleges were $3,800, $10,740, $27,560, and $38,070, respectively. However, the net price most people will actually pay is typically lower thanks to grants and scholarships.Learn More: College Tuition vs. Investing: Is It Worth It?
How do people afford college without loans?
Even without federal or private student loans, prospective students may still be able to take advantage of scholarships, grants, and/or work-study programs. These resources can reduce or even completely cover a college’s cost of attendance (COA), potentially eliminating the need to pay out of pocket. In order to find out what kind of financial aid you or your child might be eligible for, the first step is to fill out the U.S. Department of Education’s Free Application for Federal Student Aid (FAFSA).Learn More: Does the Military Pay for College?
What happens to a 529 Plan if not used?
If you set up a 529 savings plan for your child's college education, and either they decide to skip college or there’s money left over by the end of it, you can still withdraw the amount representing your original contributions without any consequences. You can do the same for the account’s earnings, but these will be subject to taxes and a 10% penalty. There are several circumstances wherein the penalty won’t apply, such as if the beneficiary on the account is changed to another family member; if the original beneficiary dies, becomes disabled, or attends a U.S. Military Academy; or if the beneficiary qualifies for a scholarship or grant.Learn More: 529 Risks to Take (or Not)
Expected Family Contribution (EFC)
An expected family contribution (EFC) refers to the amount of a student’s annual college costs that their family is expected to cover. The difference between a college’s cost of attendance (COA) and a student’s EFC is used to determine a student’s need for financial aid.
A 529 plan is a tax-advantaged savings plan that can be used to pay for costs related to K-12 education, apprenticeship programs, and post-secondary education. So long as the funds are only used for these qualified education expenses, they won’t be subject to either state or federal taxes.
Coverdell Education Savings Account (ESA)
A Coverdell education savings account (ESA) is a federal tax-deferred trust or custodial account created to pay qualified education expenses for the designated beneficiary. There's no limit to the number of accounts that can be made on a beneficiary’s behalf, though the total contribution across all accounts within a given year is limited to $2,000.
The Higher Education Act of 1965 (HEA)
The Higher Education Act of 1965 (HEA) is a piece of legislation that authorizes various federal aid programs managed by the U.S. Department of Education for post-secondary students. Within the HEA are rules and regulations that higher education institutions must follow in order to be eligible for Title IV federal student aid programs.
Uniform Gifts to Minors Act (UGMA)
The Uniform Gifts to Minors Act (UGMA) is a 1986 act that enables individuals to give or transfer assets to underage beneficiaries without incurring a gift tax (up to a certain amount), typically for education expenses. The UGMA account is managed by an adult custodian until the beneficiary takes control after coming of age.
A Pell Grant is a type of direct grant awarded to post-secondary and certain post-baccalaureate students with a demonstrated financial need. Students can receive the Pell Grant for no more than 12 semesters and will only be eligible if they and their parent(s) fill out the Free Application for Federal Student Aid (FAFSA).
A grant-in-aid is a type of federal aid that is awarded to finance a particular project or program. Grants-in-aid can be used to support programs intended to lower a college’s cost of attendance (COA) or to financially support students assisting faculty members or working on a thesis relevant to the university.
Cost of Attendance (COA)
Cost of attendance (COA) refers to the total estimated annual cost of attending a college or university, including tuition and fees, room and board, books and other school supplies, transportation, and other expenses. A school’s COA will factor into their decision when considering a student’s eligibility for financial aid.
Explore Saving for College
College Board. "Trends in College Pricing and Student Aid 2021," Page 3. https://research.collegeboard.org/media/pdf/trends-college-pricing-student-aid-2021.pdf
U.S. Government Publishing Office. "20 U.S.C. 1015a - Transparency in College Tuition for Consumers." https://www.govinfo.gov/app/details/USCODE-2011-title20/USCODE-2011-title20-chap28-subchapI-partC-sec1015a/summary
Internal Revenue Service. "Publication 970: Tax Benefits for Education," Pages 59–62. https://www.irs.gov/pub/irs-pdf/p970.pdf