Saving for College

College is expensive, and the price continues to go up. For the 2015–2016 school year, the average cost for one year of tuition, room and board at a 4-year in-state school was $19,548, up 3.1% from the previous year. The same cost for a year at a private nonprofit 4-year school was $43,921, a rise of 3.3%.*

With these figures getting larger every year, you’ll need a plan to pay for college. You can establish a more accurate savings plan when you understand all of the costs involved.

The basics:

• Tuition and fees – includes enrollment and instructional expenses
• Room and board – includes your residence at the school, your meal plan and other living costs that vary by school (some of them may even include laundry)

You’ll also have additional expenses for:

• Books
• Computer equipment
• Mobile devices
• Transportation
• Food
• Furnishings
• Spending money

Here’s the good news: You may be eligible for financial aid from the government and possibly from the college itself. Financial aid is intended to fill the gap between what your family is expected to pay and the actual cost of college. It can take the form of grants, loans and work study.

The amount your family is expected to pay, called your Expected Family Contribution (EFC), is derived by applying a formula based on information you provide in the Free Application for Federal Student Aid (FAFSA), which you have to complete every year. It includes questions concerning your income, assets, family size and the number of people in your household currently attending college.

More good news: Your EFC does not change, regardless of the college. For example, if your EFC is $15,000, you'll be expected to contribute $15,000; it doesn't matter if the college costs $19,000 or $40,000.

529 plans are an increasingly popular way to save for college. Named after Section 529 of the Internal Revenue Code, these plans offer unique tax advantages and flexibility that are ideal for college savings.

Advantages include:

• No income restrictions for contributions
• Tax-free earnings
• Tax-free withdrawals for qualified higher education expenses
• No age restriction for beneficiaries
• Variety of investment or FDIC-insured savings options

You can open a 529 account for your child, grandchild—even yourself! And unlike the Coverdell Education Savings Account, there are no income restrictions. Contribution limits per beneficiary vary by state for 529 accounts. Earnings on the account grow tax-free, and depending on where you live, you may also qualify for state tax deductions.**

Before selecting the account owner, be sure you understand how this decision may impact financial aid. When determining your EFC, funds in an account owned by the student will be assessed at 20%, meaning that 20% of the 529 plan savings are considered available to pay for college. But if the 529 is owned by the parent, the funds will be assessed at a maximum of 5.64%. So in most situations, it makes the most financial sense for the parent to own the 529 account.

* Source: The College Board. Trends in College Pricing 2015, Published Charges over Time, Table 2B.

** See your tax advisor for rules governing tax deductibility in your state.