C is for Coping with College Costs

C is for Coping with College Costs
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner

According to the College Board, a moderate college budget for an in-state public college for 2013-2014 averaged $22,826. This budget includes tuition and fees, books and supplies, room and board, transportation, and other expenses. That’s $91,304 for a 4-year degree. Ouch!

CStart early to take advantage of the power of compounding.

If you start saving towards your child’s education early, you can definitely help your child pay for these costs. The key word is help. Having your child pay some college costs will help him/her realize the value of his/her education.


If you set aside $50 per month starting at your child birth for a total of 18 years, and invest this money at 6%, you will have accumulated $19,368 by the time he/she heads off to college. That’s enough to help out with freshman year.

  • Doubling your deposit to $100 per month would cause the balance to grow to $38,735 by age 18.
  • In order to accumulate $100,000 by the time your child heads off to college, you would need to contribute $260 per month.
  • In order to earn the 6% return used in this example, you will need to take on some risk – you will need to look beyond just savings accounts at the bank.

There are more options for paying for your child’s college education than for your retirement, so make sure you contribute towards your retirement first. Otherwise, your child will need to put his/her career plans on hold to take care of you in retirement. Only then should you put any excess contributions towards your child’s college fund.

It matters whose name is on the account.

If your child is planning to apply for financial aid, it is better for college savings to be in the parent’s name. In determining financial aid eligibility, a significant portion of parental assets are sheltered from the needs analysis process. However, under current Federal formulas, money in your child’s name will reduce the amount of need-based aid your child receives.

Consider tax-advantaged 529 plans.

Created in 1996 and named after Section 529 of the Internal Revenue Code, a 529 Plan is an education savings plan operated by a state or educational institution. According to Savingforcollege.com, nearly all states operate at least one 529 plan. You can open one in most any state, but many states only allow their legal residents to deduct their contributions on their state income tax returns. Contributions are not deductible on your federal tax return. These accounts are considered an asset of the parent or custodian.


  • These accounts are tax-deferred plans – earnings are exempt from federal and state taxes.
  • Withdrawals are tax free if used for qualified higher education expenses (except in Alabama, where qualified distributions from a non-Alabama 529 plan are subject to state income tax).
  • Anyone can contribute to the plan on behalf of the beneficiary.
  • You can open an account with as little as $100. Future contributions can be as low as $25. Check with your employer to see if you can make automatic contributions from your paycheck.
  • These plans allow you to save substantial amounts, over $300,000 per beneficiary in many state plans, with generally no income or age restrictions.


  • You will have to decide how to invest the plan contributions – much like your 401(k) or IRA. A state will choose an investment company to manage its 529 plans. For example, the Oklahoma 529 plan is managed by TIAA-CREF.
  • If your child decides not to attend college or does not need the money, you will have to transfer the funds to another qualified family member as the beneficiary to avoid a 10% penalty (waived if beneficiary gets a full scholarship) and income tax.

As with any savings goal, getting started early can really add up. Instead of giving Christmas and birthday gifts, friends and family can contribute to your child’s 529 plan (not sure how well that will go over with your kids). But these accounts aren’t just for your kids. You can set one up for yourself to go back to school.