Affording a college degree is complex, with costs rising for decades. Yet, having a college education remains a meaningful way to reach success. We will point to ways to make college more affordable and even virtually free. Planning early as parents and your students to save, actively budget, research college costs, and seek financial aid are practical steps.

The Price Of A College Education

According to the latest Trends In College Pricing, the College Board average annual tuition, fees, before room and board charges published prices for 2020-2021 are:

 $37,650 for Private four-year colleges;

$10,560 for public four-year in-state colleges;

$27,020 for public four-year out-of-state colleges, and

$3,770 for public two-year (Community College. in-district.

College prices and accompanying costs have outpaced inflation since the 1980s and have jumped nearly eight times faster than wage growth. This rise is a concern for me as a mom of teens and as a college professor. My son is a rising senior in high school so I am in your camp.

I am a first-generation American and the first in my family to go to college. Like many, my parents raised me on the belief that a college education is essential for advancement. It is still true today despite many paths to success.

In the Sallie Mae 2020 National Study of college students, there were differences in how parents and students paid for college. Proportionately, more parents (44%) contributed to the college costs than the 31% in the previous year. This higher percentage offset the lower (8%) contribution from students’ from their income and savings.

This differential may be largely due to the COVID impact on high school students not working during 2020 when they earn some income.

The share of the cost of college in 2019-2020 changed from the prior year:

  • 44% covered by parent income and savings.
  • 8% from parent borrowing.
  • 8%  contributed by student income and savings.
  • 13% from student borrowing.
  • 25% covered by scholarships and grants.
  • 1% were gifts from friends and family.

 

The Need For Family Planning For College

Planning helps families get ready for college decisions. According to the Sallie Mae Survey, more families planned early in their children’s lives for their college future than the previous year.

The top three ways families planned to pay for college were: 

  •  Save for college.
  •  Research college costs and financial aid.
  • Actively budgeted.

Getting prepared for higher education also includes taking Advanced Placement courses, enrolling in community college, and learning more skills or practicing their talent.

Benefits of Preparation

By getting ready, families had access to resources to understand their purchase options. They often borrowed less, received slightly more financial aid by way of grants and scholarships than non-planners.

For these reasons, we believe that being prepared as early as possible may help you and your student afford the best college possible.

12 Ways To Make College More Affordable (Or Even Free):

 

Early Funding of your Child’s Education:

The first step is to save early for your child. The different plans below are not mutually exclusive. As always, check with your tax professional as to the respective tax implications.

1. 529 College Savings Plans

Your children’s financial future may begin as early as their birth. Establish an account once you have a social security number for your child in their name or initial in the parent’s name. You can change the beneficiaries later on.

The more you begin saving early, the more you may benefit from compound growth using tax-deferred dollars. As a result of setting aside funds well before your child’s needs, the less you will need to borrow later on. Federal student loans impose limits. However, they are the more affordable borrowing source, as compared to private loans. If your child’s education is a priority, as I am sure it is or will be, your best bet is to adopt a saving strategy.

A 529 plan is a college savings plan that offers tax-free earnings growth and tax-free withdrawals as long as you use these funds for qualified expenses. Just about every state has its own 529 plan. You may open an account across state borders. Each state’s plan varies, so check which works for you.

529 College Savings Plans 

Originally begun to save for college only, may now use these plans for tuition at primary and secondary private or parochial schools or qualified expenses at public schools. They retain their benefits. The Tax Reform Act in 2017 expanded 529’s ability up to $10,000 per year.

Under the Act, the $10,000 withdrawals per year are federally tax-free. State tax treatment of these withdrawals differs from state to state but is tax-free if used for qualified educational expenses. This benefit is not allowed in several states like New York at this time.

So check with your state’s taxing authority or state 529 plan administrator. For example, Connecticut’s 529 plan allows you to withdraw tax-free for up to $10,000 per child to be used for private school tuition. There are no maximum caps on investments per year. 

Investment Choices

Parents can typically choose among a range of investment portfolio options. They may include Vanguard mutual funds, exchange-traded funds (ETFs), static or fixed allocation fund portfolios, and age-based portfolios called target-date portfolios. Which fund you choose depends on your appetite for control and risk. You can make changes between the funds based on your children’s age or the target date portfolios, shifting from more aggressive growth rates to more conservative rates as your child ages.

 I’d like to offer some advice from our experience. Don’t set it and forget it. Whether you choose target-date funds or something else, make sure to periodically review your accounts to ensure it is growing the way you intend it for your college-bound kids. We made some changes to spur more aggressive funds than we picked at first. 

College students can use the amounts for any eligible higher education, not just four-year colleges or universities, including vocational and trade schools, community colleges, and graduate schools.

The 529 plans typically do not have income or age limits. An older person can use it for school later on. I used some of my funds for law school.

2. Coverdell Education Savings Account (ESAs)

These accounts are similar to 529 plans offering tax-free investment growth. You also can use tax-free withdrawals for qualified education costs. Like 529 plans, the invested amounts are not limited to college and can be used not only for K-12 tuition but also for expenses, including books. At one time, Coverdell ESAs were the only tax-advantaged way.

Unlike 529 plans, Coverdell ESAs have limits to $2,000 annual contributions per beneficiary as of 2020. Grandparents can set up their account for the same beneficiary with a $2,000 limit for each beneficiary account.

A Coverdell investment option is self-directed, allowing you more specific options like 529 investment track options.

Limits For ESAs

Coverdell ESAs have age and income limits. A beneficiary must use the funds by age 30 unless the beneficiary is a special needs person. If your adjusted gross income is between $190,000-$220,000 as a married couple or $95,000-$110,000 as a single taxpayer, you cannot contribute any longer.

While Coverdell ESAs give you greater investment flexibility than 529 plans, the imposition of limits has caused some to consider rolling their Coverdell ESAs into 529 plans.

3. Custodial accounts: Uniform Gifts to Minors Act (UGMA) or Uniform Transfers Minor Act (UTMA)

Parents can set up custodial accounts for each child under the age of 14 years and managed by the parent until the child turns the age of majority, typically age 18 years, unless stated otherwise. Investments in these accounts are not limited.

For children below 18 in the 2020 tax year, the first $1,100 of unearned income from the investment is tax-free to the child, after which the next $1,100 is taxed at the child’s tax rate, then income above the $2,200 is taxed at the parents’ (usually higher) tax rate. Once your child turns 18, this money belongs to them. They will be paying taxes at their rate.

Couples jointly filing can contribute up to $26,000 annually for each child, or $13,000 if an individual sets up an account. Anyone can set up a custodial account, including grandparents, aunts, and uncles.

Once the child has access to the account based on their age of majority, it is their asset. Parents may use the invested money for anything that child wants, including frivolous things that, unfortunately, the parents have little power to reclaim that asset.

These types of accounts are typically for supplemental spending for college and not likely to go to tuition.

4. Traditional IRAs And Roth IRAs

You can use traditional IRAs, regularly used for tax-deferred retirement savings. Usually, you would incur a 10% penalty for withdrawals before 59.5 years. You also would have to pay income taxes on the amount withdrawn.

There would be an exception if an individual wanted to use this account for qualified college expenses for themselves, a child, or a grandchild. In this case, there would be no penalties for early withdrawals. You would have to pay income taxes.

You don’t have the same 10% penalty for withdrawal from the Roth IRA. You have more freedom with the Roth IRA in this regard.

Tap Retirement Savings As Last Resort

Frankly, parents should never tap their retirement accounts for college tuition unless you set up these retirement accounts for their young children. Since you cannot borrow for retirement, but you can do so for college, parents or children would be better off taking out a loan for college. I provide it as an option, but I would consider other ways first.

5. Invest in Discount bonds

You can save for college costs by investing in deep discount corporate, US government (Treasury), or municipal deep discount bonds. These bonds are often referred to as zero-coupon bonds because their owners are not collecting coupons twice a year.

These bonds come in maturities of one year-40 year and do not pay semi-annual dividends like regular bonds. Furthermore, the IRS requires that you pay tax on the interest portion annually.

Tax Implications Vary

Check with your tax professional about the possible tax implications for individual securities. Federal and state tax treatments of zero municipal coupon bonds are different. Munis are known for federal tax exemption and sometimes state and local taxes as well.

On the other hand, there is no tax exemption for holders of corporate bonds.  Treasury bonds are usually tax-exempt by state and local authorities.

If safety is a priority, Treasury bonds have triple AAA ratings, so they are virtually risk-free while ratings of municipal bonds and corporate bonds vary.

You can redeem the bonds at the total or par value upon their maturity. Parents can use the proceeds of these bonds for college costs.

Deep discount bonds are not just used to save for college tuition, but their long-term nature is suitable for planning for your children’s non-tuition college needs as all.

6. Series EE Savings Bonds

The federal government sells Savings Bonds for half their value or $5,000 for maturity denominations of up to $10,000.

Like treasury bonds, they are safe based on their triple-A rating.

Usually, savings bonds are taxed at the federal level and tax-exempt on state and local levels. Still, if you are using these savings bonds for college tuition expenses, they are typically tax-exempt at the federal level 

 

7. Earn College Credit In High School

Want to earn some college credits early at little cost? The Advanced Placement program offers college-level courses and exams that you can take in high school. The exam is $95, which may save up to $3,000 for a three-credit course. It is a great way to save time and money in college if you can earn credits depending on your score.

There are 38 AP courses in a variety of disciplines. Having AP credits with a good score on your high school transcript is a massive plus for colleges considering your application.

Check Your School Policies On AP Credits

Be aware that some colleges and universities may require a score of 4 or 5. The maximum score on an AP is a 5. The exams are in May. I know because my kids are more stressed than usual!

  Among the top colleges, 86% restrict the use of AP credits. Paul Weinstein, director of Johns Hopkins University’s graduate program, assessed policies of the top 153 colleges and universities in a 2016 study.  A few colleges do not accept AP credits.

You should review your school policies on acceptance of your credits. If your choice school doesn’t accept your credits, you still got a birdseye view of future college exams.

8. Grants and Scholarships

If you borrow money for college, federal loans are far more attractive but have loan limits by year, with the freshman year maximum loan the lowest at $5,500 rising to $12,500. Interest rates on federal loans have dropped for the first time in three years based on May’s ten year treasury yields. 

To obtain a federal loan, grants or scholarships, you need to fill out the Free Application for Federal Student Aid or  FAFSA  for each academic year. The new 2020-2021 FAFSA form is about to be made available here. If not early, make sure you file it on time, as some states’ awards are on a “first-come, first-served” basis. Check your state’s practice as they differ.

Fill Out FAFSA Please

FAFSA determines whether you are eligible for need-based federal financial aid for college. It also may help you with getting scholarships, grants, and work-study programs for your student. See our family guide on how to save for college.

It is always a pain to fill out applications. However, since FAFSA will help you get more affordable federal loans to supplement your income and savings contribution, go for it. It takes time to fill out the papers and get the supporting documents together, but it is worth it if you get some financial help. Be super organized ahead of time!

Federal Gift Aid

Federal Grant and scholarship programs account for funding 31% of the average family’s needs in 2018- 2019. This percentage was above 28% of college costs last year. These dollars are “gift aid” money for college, meaning it is not a loan you need to pay back.  Almost all federal grant programs are needed-based. See the list of grants here.

The federal scholarship programs are merit-based, received from schools, outside organizations, or businesses. Parents can find information as to how to apply here. Sallie Mae’s survey of 2018-2019 showed higher dollar contributions of $8,580 for those families making more than $100,000. Another place to look for scholarship opportunities is Fastweb.

Federal Work Study

In addition to the “free aid” you can get through the federal government, federal work study programs pay at least the federal minimum wage and are on-off campus. These programs are need-based, so check out their website here.

State Gift Aid Programs

You can look at state programs for additional loans, grants, and scholarship opportunities to supplement what you are getting through the federal programs.

Take a look at the different programs by the state for possible loan/grant/scholarship opportunities here. You can look for merit-based scholarships by the college if your college is on this list. Some colleges have supportive loan programs for those families that are need-based as the 25 colleges on this list, including Harvard, do

Doug Hewitt, the co-author of Free College Resource Book, has said that there are more scholarships available for you within your home state than nationally.

9. Student Education Tax Credits

There are two major tax credits available to offset the costs of higher education. The American Opportunity Tax Credit is the most valuable of the two (the other is Life Learning Credit with a $2,000). It only applies to the first four years of post-secondary education (university, college, vocational, non-profit, or profit).

You may claim up to $2,500 per eligible student per year under the American Opportunity Tax Credit. Credits cover 100% of the first $2,500 of qualified tuition.  If the credit brings the amount of tax you owe to zero, you can have up to 40% of the remaining amount (that is, $1,000) refunded to you. There are credits for qualified education expenses of 100% up to the first $2,000 for each student and 25% of the next $2,000.

10. Colleges With Free Tuition

Several colleges offer free tuition though you will likely have to pay room, board, and living expenses. Some of these colleges may require work on campus or service after graduation to earn free tuition.

Accredited colleges with free tuition have been growing, and include:

Alice Lloyd College (KY)

Barclay College (KS)

Berea College (KY)

College of the Ozarks (MO)

Deep Springs College (CA)

St. Louis Christian College (MO)

Webb Institute (NY)

William E. Macaulay Honors College At CUNY (NY)

Williamson Free School of Mechanical Trades (PA)

US Military Academies

These colleges are a way of giving service back to your country:

US Coast Guard Academy (New London, CT)

US Military Academy (West Point, NY)

US Naval Academy (Annapolis, Md)

US Merchant Marine Academy (Kings Point, NY)

Some colleges have made their courses available online for free but may include a relatively small fee:

iTunes (Stanford University)

Open Educational Resources (OER) Commons

Open Yale University (Yale)

School of Public Health (Johns Hopkins University)

11. Go To Community College Or Public Four Year In-State College

There are many reasons to go to community college. Affordability is high on the list for that reason. Tuition and fees for two-year in-state colleges were $3,770 in 2020-2021. That is a fraction of annual costs for four-year public colleges. A full-time student will likely receive more than enough grant aid and federal tax benefits to cover this tuition and fees. If a student chooses to live on campus, those expenses will be out of pocket.

Most of my students live at home and plan to go away from home for the latter 60 credits of college. I teach diverse community college students with business majors. They are often immigrant or first-generation students at community college. Many finish their four-year degrees while working full-time, and some have children.

The pros of going to community college tend to outweigh the cons for many students. Please see our extensive article on the benefits of going to community college here.

Some great public four-year in-state colleges provide excellent value (See Value School listings in US News & World Report). They combine strong academics with lower tuition costs than private colleges.

True Story About My Hiring Preferences

I went to public colleges (CUNY) for both my BA and MBA. When I was Managing Director at my investment bank, I hired “the best and the brightest.” When my human resources employees came with stacks of resumes, all the Ivy Schools were on top. My preferences were always public colleges, given my background.

I constantly reminded HR to give me the CUNY resumes first. Then the rest could be public colleges across the country. The early days of most investment banking firms on Wall Street were filled with public college graduates if they even went to college. I am referring to Lehman Brothers, Goldman Sachs, Salomon Brothers, and others.

Here is our conversation:

HR: “I got the resumes you wanted. We think these are stellar candidates.”

Linda: “Great, thank you. Did you get any from Baruch College (a CUNY Business School)?

HR: “We think this a better group. Most are Harvard, some Yale and Princeton, and other top schools. I didn’t look for Baruch. Why do you want students from there?

Linda: I earned my MBA from there. It is a great business school—many international students. I also like paying back to students who want investment banking or equity research. Give the Ivys to some of the other analysts. OK?”

HR: “But, then you won’t get the best! They told me they only wanted to hire from top schools. You better talk to my boss.”

The funny thing was that all three of my senior management, including my head of Equity, came from public colleges and were brilliant leaders.  I finally did get my way!

12. Certain Majors Are In Demand By Employers

Certain majors are in such strong demand that employers may consider picking up some of your tuition in return for your promise to work at their firms or entities for a certain period. While there may be a shift in desirable majors, there appears to be a strong call for those students in math, science, business, nursing, teaching, and social work. Build up your soft skills–interactive communication, collaboration, problem-solving are in significant demand.

If you go to college while working full-time, many employers pay up to 100% of the tuition as a significant perk to attract those with evidence of a strong work ethic. A bit of advice: don’t pick your major solely based on your employer picking up the tab. That said, if you have an interest in that course of study, go for it!

Good luck to all of you in the coming year. I am in the trenches with you as my son is a rising Senior.

Final Thoughts

Financing a college education is complex, and most students have to borrow some money. Repayment of student loans can be an albatross for many years. If they have taken loans for school, the monthly costs for college grads delay them from making their life plans. Many postpone getting their place to live, getting married, having children, buying a car and home because of their ongoing loans.

Planning ahead of time may help you (i.e., parents/students) avoid getting overburdened by debt. Strategize how to get savings ahead of time or while in school.

Once in college, students tend to budget better than after they get their first job. Be creative about saving money even in college when you are living on a limited amount of money. My college students often inspire me with tips they share in class, and so I sometimes collect this information as we do here.

Thank you for reading this! Please feel free to visit The Cents of Money for more articles like this and personal finance topics. Subscribe for our free weekly newsletter and other freebies

 If you graduate with student loans, read our piece on paying back your student loans faster. It may involve some sacrifice when you are young to better financially position you and your family in the future.

Are you applying to college this fall or next year? What steps have you already taken to help you in seeking your college? We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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