A recent study found that a bachelor’s degree is estimated to be worth $2.8 million on average over a lifetime, and those who earn one make 84% more than the average high school graduate1. But it’s not just about higher income — our economy is transitioning to knowledge-based workers and jobs that don’t require a degree are beginning to fade away.2 Nearly two-thirds of all jobs in the US — including 18 of the fastest 30 growing professions — require some sort of postsecondary education.3
The numbers on college attendance bear this out: Fifteen million students attend an institution of higher education in the U.S. every year. Where do they go? Well, that’s the good news. There are currently approximately 1,970 bachelor’s degree-awarding institutions in the U.S.4
The growth in the number of colleges, coupled with the expansion of the student body, has meant that highly specialized degrees and institutions are becoming a thing of the past. Having to attend a specific, and usually very expensive, degree program that is often far from home is just not necessary anymore. And that’s a key piece of the paying for college puzzle.
It Starts with a Budget
The budgeting process doesn’t follow the choice of a college and work backward – that’s the old way. It starts with a realistic assessment of each family’s situation. This involves earning power, the cost of pre-k through high school education, the number of kids, and any outside sources of assistance.
The goal of the assessment is to determine a minimum and maximum price range for schools, including tuition, books, fees, and living expenses. Once you have this band set, you can build a list of schools within the price range. Picking a “dream” school and having that optimum college experience now becomes even more possible. Knowing your price range also makes it easier to compare schools and packages, since they will all be relatively similar in total cost.
Reverse-Engineer Your Savings Plan
Having a number in mind lets you save and invest with intention. You’ll be able to understand what your annual goal is, and better create an investment plan that can help you get there. Understanding the relationship between savings, investment returns, scholarships or awards and loans can help you put together a plan that makes sense and has a good chance of success.
Don’t Just Save – 529 Plans Provide Tax and Investment Advantages
529 plans are tax-advantaged savings plans specifically designed to help parents pay for their child’s education (although, they can be used by more than just parents). 529 plans are not just for college – tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies.
Although contributions are not deductible at the federal level, earnings grow federal tax-free and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.
All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. You’ll be able to create a portfolio from an offering of mutual funds and ETFs, and tailor it to your time horizon and investment preferences. Both you and your spouse (and anyone else that wants to – it’s not limited to parents) can contribute up to $15,000 per year each (in 2019) and still fall under the gift tax exemption.
You can fund the account with a total of five years’ worth of your annual exclusion gifts, so your child’s 529 can begin with a balance of $75,000.
The key to saving is to do it consistently. Figure out your budget, plan the amount you can invest, and have it automatically deducted from each paycheck.
Yes, you can negotiate tuition costs. It used to be a well-kept secret, but more colleges are upfront about the fact that they are often willing to reduce costs to secure a promising candidate or just generally boost enrollment.
The way to begin is with the admissions office or the financial aid office. Treat it the way you would an application for a scholarship – or a job interview. Make a strong case for what the student will bring to the school, and why you need a reduction of tuition. Since you’ve done your homework and you have a good idea of what the other schools in your price range are charging, you’ll be able to negotiate with confidence.
If the tuition reduction doesn’t work – appeal your financial aid award. You’ll need to file the FAFSA to get an award from the school in the first place, but this should be standard procedure even if you don’t think you qualify for any type of federal aid. School financial aid packages vary and filing the FAFSA is the first step to qualifying.
The Bottom Line
As college costs have increased, students and families have had to become much more proactive and involved in figuring out how to pay for it. But there are options, and the earlier you start the better off you’ll be.
- Anthony P. Carnevale, et al. “The College Payoff.”
- Anthony Carnevale, et al. “Recovery: Job Growth and Education Requirements Through 2020.” Georgetown University Center on Education and the Workforce.
- The State of American Higher Education Outcomes in 2019. Third Way.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.