For families of almost any background, the question of how to pay for college is one that requires serious thought and planning. One factor that can make the process difficult is the sheer number of choices; even the most financially savvy parent can quickly find themselves lost among the various investment accounts and savings plans offered by both public and private entities around the country. Because of the importance of the decision and its potential long-term consequences for a young student, the choice of just how to cover the cost of college may seem overwhelming, but certain options are often better than others given a particular financial situation. Here, we’ll tackle the question, “What is the best way to pay for college tuition?” Keep reading to learn more.
Popular Ways Families Pay for College Tuition
When planning for a loved one’s college education, expect a huge price tag, even for public universities. Currently, the cost of college tuition is increasing at an astronomical rate, far beyond increases in earnings, making it ever more difficult for families to afford to pay for college tuition. However, with the proper financial tools, it’s possible to cover much of the expense, minimizing the need for student loans or even erasing them altogether. Below, we’ll examine some of the best ways to pay for college tuition.
For many families, 529 plans have proved to be powerful tools that can lower the out-of-pocket costs associated with college, sometimes significantly. Unlike other investment plans, 529 plans offer tax-free earnings on investments that can then be spent on a variety of education-related expenses, including college tuition. Some plans can also be used to pay for things like room and board, computers and equipment, and even books.
In many ways, Coverdell Education Savings accounts resemble a “lite” version of 529 plans; they offer tax-exempt growth on investments if used for education expenses, but they feature a strict limit on contributions: $2,000 per year. They do offer a bit more flexibility than a 529 plan though, both in terms of what expenses are allowed and how often an account owner can change the allocation of funds in their portfolio.
Sometimes, the simplest solution is the best, and no college savings option is simpler than a traditional savings account. The funds in these accounts can be used for pretty much anything, including college tuition, and there are no taxes to consider. However, they tend to feature little to no growth, with interest rates that are often a fraction of a percent.
UGMA/UTMA Custodial Accounts
Because they’re not specific to education expenses, UGMA and UTMA custodial accounts can cover a range of costs. The assets in these accounts are managed by an adult until the beneficiary comes of age, and the tax benefits of giving to a UGMA/UTMA account can serve to incentivize contributions by friends and family members. The downside is that once control of a UGMA or UTMA account passes to the beneficiary, they can use the funds however they please.
Most people are familiar with the benefits of a Roth IRA: After-tax funds go into an investment account, where they grow tax-free until retirement. The widespread availability of IRAs and their relative familiarity for many individuals make them an attractive option for those looking to pay for college tuition down the road, but keep in mind that taking funds out of the account before reaching retirement age can incur financial penalties.
Federal Financial Aid
Each year, the federal government doles out financial aid aimed at helping families pay for college tuition, a process that begins by filing a FAFSA. While this aid is undoubtedly beneficial for those looking to cover the cost of college tuition and housing, remember that having additional assets in other accounts can affect financial aid decisions (though it’s worth noting that a parent-owned 529 plan only slightly affects FAFSA decisions).
Private Financial Aid
Another common path that many families pursue to help pay for college tuition is private scholarships, which are made available through a variety of charitable organizations. Many colleges also offer their own forms of financial aid, so when your child has picked a school, be sure to look into that institution’s options for private financial aid.
Choosing the Best Way to Pay for College Tuition
Now the big question: Which of these financial tools is the best? The answer will always be an individual one revolving around your family’s particular needs. If you’re sure that you want to use the funds for education, an account focused on that – like a 529 plan or Coverdell account – might be the best option, whereas someone who already has most of the funds they’ll need and who simply wants to keep them safe might be best served by a standard savings account.
Take into account the rate of return (and level of risk) you want to see, and consider whether the restrictions on a particular fund could impede the use of those assets when college rolls around. Ultimately, what makes a savings plan best is its ability to serve your particular interests.
Open a 529 Plan Today with the Free Sootchy App
If opening a 529 savings plan appeals to you, know that you can start a new account quickly and easily with the free Sootchy app. The entire process can be completed in as little as 15 minutes, and once you’re enrolled, you can conveniently manage your account and even invite friends and family to make contributions through your mobile device. Learn more about how we can help you pay for college tuition by visiting us online or downloading the Sootchy app today.