How to prioritize & plan for college costs

It’s hard to overestimate the value of a college education. But, it can come with a hefty price tag and a considerable amount of debt. While choosing the right college is important, figuring out how to pay for it may be just as important. It’s hard to know what to prioritize now, and what to put on the backburner for later.

But paying for college—and planning for everything else—is doable. The answer is to create a solid plan and work with your kids to reach those college-saving goals.

The first step to prioritize is determining the ballpark range of what college will cost.

The total annual cost of a four-year college ranges from $27,940 (at an in-state public school) to $57,570 (for a private college or university) in the 2022-2023 academic year.

These numbers typically include:

• Tuition and fees
• Room and board
• Textbooks
• Computer and related supplies
• Daily living expenses

The good news? There may be a big difference between a school’s sticker price and net cost. A family may pay as much as 60% less than the stated tuition since scholarships and grants chip away at the price tag.

And while you can’t know what sort of education your child will want or need when they’re very young, the U.S. Department of Education’s net-price calculator can help you browse among the possibilities.

You may want to cover the entire cost of your child’s education. Or maybe you want them to have a vested interest in their future by making some sacrifices and taking on part of the savings responsibilities. The sooner you outline your family’s plan the better.

“Doing the pencil math always will suggest saving for your retirement first,” says Clint Jasperson, Wealth Advisor at Thrivent and a parent himself. “This is because of the power of compounding. When comparing funding college versus retirement accounts, college funding may need up to 20 years while retirement accounts may need up to 60 years.”

“This leaves you with the challenge of reconciling the conflict between your responsibility for providing education to your kids with providing for yourself when you stop working. Or balancing posterity with prosperity,” adds Jasperson. “Intuitively, this makes sense but is hard to practice. After all, what good does providing for a college education do if it jeopardizes the long-term financial security of the family?”

One way to vest your son or daughter in the savings process is to tie your contributions to your child’s academic performance. You’ll make them responsible for their own success—and they’ll feel better about your helping out, too. Consider savings techniques like contributing two or three times every dollar they deposit. (After all, you’re bringing in just a little more income, right?). Or, if they aren’t working, decide an amount to contribute after each report card tied to their grade-point average. No matter how you do it, they’ll have a more significant stake in their future.

Mid adult mom invests time to teach son

The mid adult mom invests time to teach her son. She is pointing something out to him on his work.

How the new student aid index (SAI) affects college financial aid

Exit EFC, enter SAI. The newly revised Free Application for Federal Student Aid (FAFSA) no longer calculates an Expected Family Contribution—a.k.a., EFC. Instead, a new factor called the Student Aid Index, or SAI, now influences how much federal need-based financial aid an applicant receives.

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There's no such thing as being too early to the table with a college savings plan. Opening an account is right there on the timeline along with buying a crib and a car seat.

It shouldn’t be painful to maintain a dedicated college savings account; four out of ten parents saving for college do so. In a best-case scenario, you’ll gain some tax advantages while saving. Here’s an overview of three popular options:

The most popular type of college-specific savings account, the state-administered 529 plan, is the more flexible tax-advantaged plan among its peers. You typically can contribute between $235,000 and $550,000 in after-tax dollars with no income caps. (Check your state’s plan for specific limits.)

Contributions usually are invested in mutual funds and exchange-traded funds. Withdrawals are tax-free provided that you use them for qualified educational expenses such as tuition, room and board, and books.

An advantage of a 529 is that you can transfer unused funds from one student beneficiary in your family to another—even yourself if you’re thinking of hitting the books again. And, if your child doesn't use the 529 plan funds at all, the Secure Act 2.0 now allows them to be transferred to a Roth IRA in your child's name.

• Read more on the specific rules: The Secure Act 2.0 allows a 529 plan rollover to a Roth IRA.

Another 529 option is a Prepaid account. Like a traditional 529, it comes with high contribution ceilings (about $300,000 in after-tax dollars, state-dependent), no income barriers, and the ability to switch beneficiaries. However, it differs in that it’s school-specific. You choose a state college, lock in a tuition price, and work toward that savings goal.

A Coverdell Education Savings Plan lets you save up to $2,000 in after-tax dollars annually, tax-free until your child turns 18. As the person setting up the account, you are the custodian and your child is the beneficiary. 

Its small contribution limit caps your potential total significantly while offering better potential returns than a conventional savings account and more investment freedom than a 529 plan. You get to choose how the money put into it is invested.

Unlike a 529 plan, it comes with a household income ceiling. The 2023 limits for custodians' total modified adjusted gross income (MAGI) are:

• $220,000 for a married taxpayer couple
• $110,000 for single taxpayers or a married couple filing separately

Earning more than these amounts means you can't open a Coverdell account.

In a UTMA, a parent or perhaps a grandparent acts as custodian for a trust account. You control its assets until your child reaches the age of termination, which is 18 to 21, depending on the state. Your child can use the money for any purpose, even a spontaneous Spring Break trek or a new car, so monitoring withdrawals and their use is wholly up to you.

• Read on about all of the college savings plans available to you.

Be sure to file the FAFSA (Free Application for Federal Student Aid form) each year—that is, if you did in the first place. Some financial aid is first come, first served, so it's a good idea to complete the FAFSA as soon as possible—while your student is still finishing high school. It is important to pay attention to each individual school's FAFSA deadlines to maximize financial aid.

The FAFSA typically becomes available on October 1 each year for the next school year. The application window stays open until June 30 of the following year, but it's important to realize some schools have earlier deadlines and some may allow it to be filled out right up to the start date of the term.

It’s their future, and the bigger stake they have in it, the more it will mean to them. Your child must understand the importance of paying for an education in the context of everything and everyone else they value.

• Help your children create a vision of their learning future. Talk with your children to help them see how their interests can become a cherished vocation. Has your oldest always wanted to be a doctor, while your youngest adores the visual arts? Encourage them to start turning those dreams into tangible goals. It’ll make the sacrifices they’re about to make much more meaningful.

• Assist each child in building their own savings strategy. You’ve been guiding your children in developing their commitment to save, give, and spend with short- and long-term goals in mind since they were able to hold a dollar. Using that framework, be sure to weave college savings into their budgets as soon as they start getting an allowance—and establish its high priority.

• Have your child research scholarships and grants. Applying for scholarships and grants is another often misunderstood part of college planning, even though these sources fund 25% of total college costs each year, and students receive an average of $9,744. Tracking down your family’s piece of this $24 billion pie can be a fantastic journey if your child is willing to dig in and do some research. What’s more, in addition to traditional academic and sports scholarships, many niche scholarships are available to tenacious applicants.

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Free college savings calculator

Saving for your children's education requires a long-term plan. And, like saving for retirement, the earlier you start your plan, the better. Use this calculator to help develop or fine-tune your education savings plan.

Try it out

Planning how to pay for a college education takes time and effort. But when you approach the process as a family and empower your kids to take an active role in their futures, you’ll make the most of the relatively short time you have to grow your savings.

To learn more about creating a college-savings plan that works for your family, connect with a Thrivent financial advisor.