Plan ahead to meet the rising cost of college

The rising cost of higher education is out-pacing inflation; families need to plan accordingly.

The rising cost of higher education is out pacing inflation by an average of about 4 percent. In the past year, tuition has risen by approximately 6 percent in most cases. Many families are struggling to find what may be the best way to pay for college.

Applying for financial aid is usually the first step that individuals will make to help with the cost. There are four basic types of aid that can be received: work study, grants, loans (federal and private) and scholarships. This is done by filling out the Free Application for Federal Student Aid (FAFSA form). The form is filled out in January and February before the student’s fall classes and determines what financial aid one is eligible for. Eligibility is need based. Student resources, parent’s resources (if student is considered a dependent) and academic status (full time, part time) are used in the calculation.

Once the FAFSA form is completed, it will create the Expected Family Contribution (EFC). The EFC is notthe amount of money the family will have to pay for college nor is it the amount of federal student aid one will receive. It is a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school will send a financial aid award letter in the spring. This will then assist in calculating what will be needed to cover cost of attending school for a year.

If there is time, specific colleges saving tools are available. Many states have 529 plans. The benefits of these plans are that withdraws are not taxable, earnings are tax deferred, contributions are considered gifts and funds can be transferred between siblings and doesn’t impact American Opportunity, HOPE and Lifetime Learning Education Tax Credits. Coverdell Educational Savings Account is another savings vehicle for college. It works similar to a Roth IRA but strictly for education.

There are a few creative solutions that families may consider. Relatives are helping through estate planning strategies such as gifting or paying tuition directly to the university (no gift taxes). Parents and students are sharing on the contribution to school by using funds freed up by the student no longer living in the household and/or cutting back on expenses.

More information on planning for higher education and personal finances can be found on the eXtension website.

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