How to Maximize College Tuition Payments

Fall is officially here, and school is back in session. Now begins a busy time filled with many activities and milestones for seniors in high school. But time flies by, and before you know it, the college application process is in full swing.

Once the application process has moved to the college acceptance and decision process, it is essential to consider the financial impact of the dream school on the family finances. According to the National Center for Education Statistics, the average yearly cost of tuition at a public, four-year college was $8,487 for in-state tuition and $18,809 for out-of-state tuition, versus $30,065 at a private, four-year college for the 2020-21 school year.

Many families leave saving to chance, hoping to figure it out along the way after their child gets accepted to their dream school. It’s then that they realize that merit-based aid, outside scholarships, and prepaid tuition plans can make the world of college funding seem a bit like a maze.

While conversations about how you will pay for tuition can be uncomfortable, having an open discussion about it will help your child understand the financial reality of paying for college.

To help navigate this process together, consider these tips when planning and saving.

CHOOSING A PRIVATE OR PUBLIC UNIVERSITY

There are many factors to consider when deciding on where to attend college. Whether your child ends up at a public college or private school, tuition costs are an inevitable part of the experience. It’s helpful to understand how school funding affects tuition and other costs for students ahead of time.

Private colleges rely primarily on tuition, foundation grants, endowments, and donations. Because of this, the cost of attendance is usually much higher at private schools. Public universities can typically offer lower-cost tuition due to the government subsidies they receive and provide more research facilities and labs due to more considerable student resources and facilities. On the flip side, while private colleges often have more expensive tuition, financial aid packages and tuition discounts can sometimes make them more affordable than a public college.

TAKING ADVANTAGE OF FINANCIAL AID

Financial aid is a complex topic, a bit of both science and art. And the rules are subject to change. Both public and private colleges offer federal financial aid packages to help offset tuition costs. These packages can include scholarships and grants that do not need to be repaid after graduation and loans to either the student or parent that do require repayment.

Packages are often determined based on the student’s financial aid application, which is produced using the Free Application for Federal Student Aid (FAFSA^®) form. Even if a student does not anticipate receiving a scholarship or grant based on financial need, it is wise to fill out the FAFSA form because there are a variety of scholarships or grants available based on merit.

Private colleges are known for offering more scholarships and grants than public colleges due to their large endowment funds. Additionally, they will typically offer more sizeable tuition discounts. The actual revenue that private colleges take in per student on average is less than the list price (including room and board) at many public universities.

Merit aid is awarded based on academic, athletic, artistic, or special-interest merit. Keep in mind that Ivy League schools do not offer merit aid.

Once a student has received an acceptance letter to a school, you can look at the aid offered and determine if it’s satisfactory. A little-known fact is that there is often an opportunity to appeal to the desired school for additional merit aid. Of course, like all things in life that are negotiable, it helps to start by having multiple financial aid offers from similar schools. Appeals that come from the student will have weight and are likely to be considered.

SAVING EARLIER IS EASIER THAN SAVING LATER

According to Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Funding college savings accounts earlier rather than later is best, but what if you haven’t saved much?

There are many options when it comes to choosing a college savings account, but the two most popular are a 529 plan and a prepaid tuition plan. 

The 529 plan allows the contributions to grow tax-free. Every little bit can help. Parents who open a 529 plan when their child is a freshman in high school may be able to take advantage of the tax benefits and reduce their potential out-of-pocket tuition costs. Ideally, a 529 plan should be set up when a student is much younger, but even just a few years of compound interest can make a significant impact.

Let’s say you start by opening the account with $100. You invest $500/month for four years and earn a 5% rate of return. At the end of four years, when your child is a senior, you would have $26,629.53.

Another excellent benefit is that the 529 plan’s distribution is tax-free when a student takes money out of the account for qualified expenses (tuition and fees, room and board, and books and supplies). Many states sponsor 529 plans, and if you live in a state with state taxes, you may receive a tax deduction or credit for contributing to that state’s 529 plan.

Prepaid tuition plans allow you to lock in future college costs at today’s tuition rates and offer the same tax-free benefits that a 529 plan does. By committing to this savings plan, you can significantly contribute over time, typically without a limit on how much you can invest. Keep in mind that prepaid tuition plans are only available to residents of the states that offer them, so if your child decides to attend an out-of-state school, the options for utilizing these funds are more limited.

GETTING STARTED

There is no “one-size-fits-all” approach to college savings. Timeline, risk tolerance, and the amount required to fund college tuition are significant factors. While tuition and merit aid are negotiable, it’s best to devise a savings plan without factoring in any potential discounts. And remember, it’s never too late to start, and no amount is too small to save for college tuition.

Please reach out to your Resource Consulting Group advisor to help you get started with saving or paying for college. We’re here to help.