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10 Ways to Pay for College

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10 Ways to Pay for College

College in the United States continues to become more and more expensive–and these trends don’t look like they’ll be slowing down anytime soon. Plus, with college attendance rates on the rise, there is an increasing number of parents across the country who may be wondering how they’ll be able to afford to pay for college.

The good news is there are plenty of investment vehicles and savings options to help prepare for the educational expenses families will face down the road. And for the parents who couldn’t get a head start on saving for college but whose kids are heading off to school soon, we’ll also cover some ways you can pay for college today using the tools and resources available.

529 Savings Plan

One of the more common ways that parents save money for their children’s education is through a 529 plan. 529 plans offer federal and state tax benefits when the funds pay for qualified educational expenses. Thus, the withdrawals from these accounts are tax-free when they’re used to pay for college. 

There is much room to grow with a 529 plan, seeing how the maximum investments can exceed $500,000 over the life of the account for certain plans. Plus, any accounts owned by dependent students will be viewed as parental assets by FAFSA, so withdrawals to pay for school do not have to be reported as income for the student. 

Of course, like with any investment, a 529 plan has some disadvantages. For one, the earnings on a 529 strategy are subject to income tax and a 10% penalty if the money isn’t used for qualifying education expenses. Plus, the investment options are limited to what the program offers, not offering much flexibility and control to the accountholders.

Lastly, and for 2022, withdrawals paying for your child’s schooling from a 529 plan in someone else’s name will generally need to be added to your student’s income on the FAFSA application the following year. 

Because of pending changes to the Free Application for Federal Student Aid (FAFSA), students will no longer have to disclose cash support. Effective for the 2024–25 school year, grandparent-owned 529 accounts will no longer impact a student’s eligibility to receive need-based financial aid.

Since 529 plan ownership can have major implications on how much federal aid your child could receive, this might be something to strategize around. 

529 Pre-Paid Tuition Plan

The 529 Prepaid Tuition Plan allows you to set aside money for your child’s education, locking in the costs in today’s dollars. Parents can purchase units or credits, and once the child is ready to attend school, the funds can be used to pay for the education costs. 

Once a parent purchases credits, the plan’s administrator invests the money, even though the payout at the end is guaranteed based on in-state tuition costs. 

While this can save parents money over the long run, these plans do tend to be more restrictive than other types of 529 college savings plans. For example, the funds can only be used on tuition and fees, not on books, room and board, and other expenses.

Plus, they are often offered through the state government and only available to state residents, restricting your child to attending that specific school. So, for parents who are unsure where their children will want to attend college, this may not be the best route for college savings.

Roth IRA

You may be surprised to see the Roth IRA on this list, as it’s a retirement account. However, using this account can help pay for college.

As a reminder, a Roth IRA lets you contribute after-tax income, though you can withdraw the funds later on tax-free once you turn 59 with no penalty. Plus, when you withdraw funds from a Roth IRA to pay for college, it’s considered untaxed income to the beneficiary. The standard 10% early withdrawal penalty is waived when it’s used to pay for higher education. 

Thus, parents can count on their Roth IRA accounts when saving for their children to go to school. Roth IRA accounts have a wide range of investment options, giving the account holder control and flexibility over the funds so they can prepare for college spending. In addition, retirement account balances are not considered in the FAFSA decision, so it won’t limit the amount of federal aid your child could potentially receive. 

On the other hand, there are some limitations when using a Roth IRA to save for college. One of the main restrictions is that there is a maximum amount that can be contributed to a Roth IRA in a given year. For 2022, that limit is $6,000, and only couples earning less than $214,000 can make Roth IRA contributions. So, a Roth IRA is not a college savings option for high-earners.

529 Superfunding

Superfunding a 529 plan is a college saving option for those with excess funds to contribute, and it also works as a tax shield for the contributor. 

Superfunding could allow you to claim gift-tax allowances and tax credits over the next few years, depending on your contribution size. Specifically, you can contribute a lump sum today as if you were spreading it over the next five years. 

This cap is $15,000 annually, which can be contributed with the gift-tax exemption. So if you had an extra $50,000 that wasn’t needed for retirement savings or funding your lifestyle, you could contribute the entire sum at once. This would then get split over the next five years at $10,000 per year, below the annual gifting limit.

The limits here come from state regulations around how much a 529 account can have invested in it, which in most states is around $500,000. Plus, when doing the math, you can see that there’s a limit of $75,000 per superfund, which is $15,000 * 5 years if you want to continue qualifying for the gift-tax exemption.

Utilizing Cash Flow

Now let’s shift away from college saving options. In the rest of this guide, we’ll take a look at how you can pay for school now if your child is nearing that age and the above options are no longer available, given your timeline. 

One way that parents can pay for their child’s education is to use the cash flow they receive from their traditional income sources. The viability of this option will depend on how much income you bring in that is not needed to save for retirement or fund your day-to-day expenses. Plus, it will largely hinge on where your child chooses to attend school.

So, assess how much disposable income you could contribute each semester, and check the tuition costs at your child’s school to see if it’s feasible. In-state tuition at a public university may be reasonable for some, while paying out-of-pocket for an Ivy League school may be out of reach for most. 

Federal Student Loans

If you don’t have the cash on hand to pay for your child’s education each semester, you may want to consider federal aid options. The federal student loan program offers fixed-interest loans to both students and parents and is either subsidized or unsubsidized. 

Subsidized loans are based on financial need, and the government pays the interest that accrues on these loans while your child is still in school. On the other hand, unsubsidized loans require your child to pay all interest that accrues on the loan. 

The first step here is for your child to fill out FAFSA, which is free to apply for and the starting point for receiving all federal aid for schooling–including grants and loans. They will consider your child’s income levels, your income levels if they’re still a dependent of yours, and other factors to determine what amount of aid and type of loan your child can qualify for.

There are annual limits to how much a borrower can receive in federal loans, and undergraduates can borrow up to $12,500 annually and $57,000 total in federal student loans. So, there may still be funding gaps depending on the cost of attendance of where your child chooses to go to school. 

Private Student Loans

Once you’ve exhausted federal aid options, students or parents may want to turn to student loans from private lenders. Private student loans can be provided by major banks or other financial institutions that specialize in student loans. 

Most lenders for private student loans will have credit requirements to qualify, meaning many students may not be approved for the loan on their own. Thus, having a cosigner on private student loans is quite common and can help the borrower achieve a better interest rate or qualify for the loan altogether.

Each individual lender will have its own qualification requirements and maximum loan amounts that they’ll offer, so you’ll want to shop around for the most attractive deal, given your child’s situation. Plus, private lenders tend to charge higher interest rates than what you can get on federal student loans, so this should only be considered once federal aid has been exhausted. 

Grandparent Gifting

Another way you can pay for your children to go to college is through generous gifts from their grandparents–either your parents or your in-laws. While this won’t necessarily be an option for everyone, it is a route that means your child won’t have to repay a loan for the coming years if you cannot save for those expenses yourself.

Taxable Investment Accounts

If you didn’t set up a 529 plan to save for your child’s college education and you don’t have a Roth IRA plan, you may have a standard brokerage account somewhere that you could use to pay for these expenses. 

The benefit of these accounts is that there’s great flexibility and control over investment options, and there typically aren’t rules about what the funds can be used for. The downside, then, is that you will likely be subject to costly capital gains taxes, which could be up to 20%, depending on your tax bracket. 

So, carefully consider the impact that taxes will have on the amount you will withdraw to pay for your child’s schooling because you may end up with less than what you thought you had. 

Scholarships

Lastly, scholarships are a great way for students to pay for college, as they are forms of free aid that don’t need to be repaid. Scholarships can come from various sources, including schools, individuals, nonprofit organizations, clubs, and others. 

Often, scholarships are based on merit or some other qualifying criteria as opposed to financial need, meaning students from any background can apply for the same scholarships. Regardless, the qualifications for scholarships will vary case by case, so you should always do your research to see which ones your child could qualify for. 

In addition, scholarships can range widely in dollar amounts, with some students able to secure full-ride scholarships off of academics or athletics. However, there are many other scholarships out there in smaller amounts. Students shouldn’t overlook these smaller scholarships because they can make a dent in a student’s tuition when they’re all put together. 

Final Thoughts: How to Pay for Your Children to Attend College

Considering the above strategies you can utilize to save for your child to go to college, you can see how beneficial it is to plan and get an early start. If this wasn’t the case for you and your family–you don’t have to stress–there are still plenty of options available to you and your child so they can secure the funds they need to go to school.

Of course, sending your child to college debt-free is always the goal. So if you want to take control of your child’s college savings plan, consult with a financial advisor who can ensure you find the right plan for you and your family. If this sounds like you, schedule a free consultation with our team today to start getting your college savings plan on track.

 

Disclosures

Securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Vaylark Financial Services and IFG are unaffiliated entities. Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.

Investing is subject to risk, including possible loss of principal. Determining which investments are appropriate for an individual investor will depend on your investment objectives, risk tolerance, and time horizon and should be discussed with your financial advisor before implementing any investment plan.

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