Paying for College: How to Prepare for Future College Costs
If you are a parent actively thinking about college admissions, you are likely focused on helping your child build a strong academic and extracurricular profile. But while academics and applications are key parts of the process, paying for college is just as critical. The cost of higher education continues to rise, making financial preparation essential. Whether you are years away from the application process or just starting to navigate it, knowing how to save money and plan for future college expenses can help reduce the financial burden.
In this post, we will explore the best strategies for saving money on future college costs and how to maximize financial aid, including guidance on the Free Application for Federal Student Aid (FAFSA).
Why Financial Preparation Is Essential for College Admissions
Many parents focus heavily on getting their child into the right college, but the cost of attending can be just as overwhelming as the application process. College tuition and fees are often much higher than anticipated, and families that don't plan ahead may find themselves taking on significant debt.
Here are a few reasons why you should focus on paying for college early in the admissions process:
Rising Tuition Costs
College tuition has been rising steadily, far outpacing inflation and wages. Planning ahead will help you keep options open and avoid the need for excessive student loans.
Reducing Student Loan Debt
Loans are available to help cover the cost of college, but taking on too much debt can place a heavy burden on both parents and students. Proactively saving money will allow you to minimize the amount your child has to borrow.
Maximizing College Choices
By saving now and exploring financial aid opportunities, your family will have more flexibility in choosing the right college for your child—whether it’s a public university, private college, or out-of-state school.
Saving Money for College: The Basics
It’s never too early—or too late—to start saving for college. Even if your child is approaching senior year, there are still steps you can take to reduce the overall cost of their education. Here are some of the most effective ways to save for college costs:
529 College Savings Plans
A 529 plan is one of the most popular and beneficial ways to save for college. These oftentimes tax-advantaged savings accounts are designed specifically for educational expenses, allowing your investments to grow tax-free. Additionally, withdrawals used for qualified education expenses, such as tuition, room and board, and textbooks, are also typically tax-free.
● Low Impact on Financial Aid: Because 529 plans are considered a parental asset, they are assessed at a lower rate on the FAFSA. This means they won’t significantly reduce your child’s eligibility for financial aid.
● Flexibility: 529 plans can be used for a variety of educational expenses, including private K-12, undergraduate and graduate programs, trade schools, and even certain international colleges.
Please consult with your investment advisor to learn if this option is right for you.
Custodial Accounts (UGMA/UTMA)
Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow parents to save money for their child, with funds managed by a custodian until the child reaches adulthood. While these accounts offer flexibility in terms of how the funds can be used, keep in mind that they may have a greater impact on financial aid, as the assets are considered to belong to the student.
Roth IRAs for College Savings
Roth IRAs, traditionally used for retirement, can also be a useful tool for saving for college. You can withdraw contributions (but not earnings) tax-free for qualified educational expenses. The key advantage is that retirement savings accounts are not considered when determining eligibility for federal financial aid though it may be necessary to report retirement assets if the college being applied to also requests the CSS Profile financial aid application in addition to FAFSA.
Again, please consult with your investment advisor to learn if this option is right for you.
Maximizing Financial Aid with FAFSA
Filing the FAFSA is a critical part of the financial aid process. It determines your eligibility for federal grants, loans, and work-study programs. Even if you expect to pay for most of college out of pocket, you should still file the FAFSA to ensure your child gets all the financial aid they're entitled to.
Here’s how to ensure your savings won’t negatively impact your child’s FAFSA results:
Parent-Owned Accounts Are Better: Parental assets are assessed at a much lower rate (up to 5.64%) than student-owned assets (up to 20%) in the FAFSA formula. Fortunately, 529 plans are considered a parent asset and will have less impact on financial aid eligibility than a student-owned account.
Monitor Your Income: FAFSA looks at your income from the prior-prior year (two years before your child starts college). If you expect a large financial windfall, try to manage the timing so it doesn't inflate your income in the years leading up to the FAFSA.
Use Student Savings Strategically: If your child has money saved in their own name, consider using those funds to pay for college expenses or other expenses before completing FAFSA.
Spending Your Assets: If you are planning for a large expenditure (new home, new car, etc.), spend the money (and remove it from your account) prior to submitting your FAFSA Application as you list your current assets as of the day that you are submitting the application.
Reducing College Costs: Beyond Savings
In addition to saving early and maximizing financial aid, there are other strategies you can use to reduce overall college costs. These options can make a significant difference in the total amount you pay for your child’s education.
Scholarships and Grants
Scholarships and grants are some of the best ways to reduce college costs because they do not have to be repaid. Your child can apply for scholarships based on academic achievement, athletics, community involvement, or even special interests or hobbies. Make sure you start researching scholarships as early as middle school or freshman year of high school, as some scholarships are available for younger students.
Encourage your child to apply for both local and national scholarships, as many smaller awards can add up quickly.
Consider Honors Programs or In-State Public Colleges
Honors programs often provide access to additional scholarships, special housing, and academic perks that make attending college more affordable. Research colleges that offer honors programs and determine whether your child qualifies based on their academic achievements.
Additionally, in-state public universities typically offer lower tuition rates for residents, and many have scholarship programs that can make attending even more affordable.
Dual Enrollment and Advanced Placement (AP) Courses
Encourage your child to take advantage of dual enrollment programs or Advanced Placement (AP) courses while in high school. These programs allow students to earn college credits before they graduate, potentially reducing the number of semesters they’ll need to complete a degree.
Dual enrollment and AP classes can help your child save money by reducing the total amount of tuition you’ll need to pay, and they also demonstrate your child’s academic readiness to colleges during the admissions process.
Create a Financial Plan That Fits Your Family’s Needs
Paying for college doesn’t have to be overwhelming. By combining early savings strategies with a thoughtful approach to financial aid and cost-reduction methods, you can make higher education more affordable for your family. Begin by creating a financial plan that considers the following:
● Set a Savings Goal: Estimate the cost of the colleges your child is interested in, and determine how much you can reasonably save each year.
● Research Financial Aid Opportunities: Look into potential scholarships and grants, and make sure to complete the FAFSA early during the 12th grade to take full advantage of available aid.
● Explore Cost-Saving Options: From dual enrollment and honors programs to attending in-state public universities, explore all the ways you can cut costs without sacrificing quality.
Conclusion
When planning for college, it’s important to think not only about admissions but also about how to pay for your child’s education. By saving early, utilizing tools like 529 plans, and understanding how to maximize financial aid, you can reduce the financial strain that often comes with higher education. Combine these savings with strategies to reduce costs, and you will be setting your family up for success when the time comes to pay for college.
