You look at your paycheck, and then you look at the tuition and fees that even the most "affordable" state colleges and universities charge. You cannot help but panic. How, you wonder, will you ever sock away enough money to help pay for your children's college education?
Rising College Costs
Between the 1994-95 and 2024-25 academic years, average published tuition and fees (adjusted for inflation) have increased significantly:
- Public two-year in-district institutions: from $2,780 to $4,050.
- Public four-year in-state institutions: from $5,740 to $11,610.
- Private nonprofit four-year institutions: from $24,840 to $43,350.
These figures highlight the substantial rise in college costs over the past three decades.
Financial Tools for College Savings
The good news? There are several financial tools available to parents who want to help cover the costs of their children's college educations. Depending on how early parents start investing, these savings accounts and trusts can help parents steadily build a nest egg that their children can tap once it is time to head off to college.
The range of savings vehicles is excellent, but it also represents a challenge. Parents will have to research their savings options carefully to find the right tool for them and their children.
529 Savings Plans
One of the more popular college savings vehicles is the 529 savings plan offered by states across the country. These programs allow parents to invest after-tax dollars today that can grow on a tax-deferred basis over time. Also, withdrawals that pay for qualified education expenses can be tax-free in most cases. Even better, some states provide state income tax deductions for residents who invest in their 529 plans.
One form of these plans is the Section 529 Prepaid Tuition Plan. These plans allow parents to buy tuition in today's dollars. The state running the program then agrees to give you the equivalent amount of tuition in the future, helping parents manage rising tuition costs.
However, parents should pay close attention to fees and ensure they choose plans with administrative costs of 1% or less of their assets. Additionally, some plans have restrictions on where children can attend college, so flexibility is key.
Coverdell ESA
The Coverdell ESA plan allows parents to contribute up to $2,000 annually per child. These funds can cover any cost associated with attending college, and they can even be used for K-12 tuition. Unused funds can be transferred to another child’s account or rolled over into a new Coverdell ESA.
There are income limits to contribute the full amount, and contributions must stop once the child turns 18. If unused, the funds eventually go to the child, even if they do not attend college.
UGMA/UTMA Accounts
Parents or grandparents can set up custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Unified Gift to Minors Act (UGMA). These accounts allow unlimited contributions, offering more control over investments. However, at age 18 or 21 (depending on the state), the child takes full control of the money, which does not need to be used for educational purposes.
Seeking Professional Guidance
The sheer number of college savings options can be overwhelming. Speaking with a licensed financial advisor can help parents understand their options, including Coverdells, UTMA accounts, and 529 plans. With the right guidance, saving for college becomes a manageable goal rather than a source of stress.