Paying for college is among the biggest expenses many families will ever have, second only to buying a home. According to the College Board, total costs for tuition, fees and room and board this year average $19,000 for a four-year college for in-state residents and $42,000 for a private non-profit four-year institution. Multiply those numbers by four—or even more since many don’t graduate in four years—and the costs are minimally $76,000 for a four-year public institution and $168,000 for a private one at current rates. Moreover, those rates are likely to rise in the future.
Given this reality, it’s imperative for families to have a college funding plan. Even if students qualify for some financial aid or scholarship they’re not likely to get a completely free ride—fewer than 0.3% do, says Mark Kantrowitz, Senior VP and publisher of Edvisors.com, a website focused on planning and paying for college.
Here are five basics that advisors should inform their clients regarding college planning for their children and grandchildren.
1. Fund a College Savings Plan Early and Often
“Every dollar you save is a dollar you don’t have to borrow,” says Kantrowiz. “And every $1 you borrow costs $2 by the time you pay back debt.”
Starting early also means having to save less in the long run because savings will grow from earnings. “If you start saving sooner than later about one-third of the fund’s size will come from earnings,” says Kantrowitz, but if you wait until the student is in high school “less than 10% will.”
What doesn’t come from earnings has to come from contributions.
2. Open a 529 College Savings Account
This is the most popular college funding plan, used by 12 million American families. Investments in these plans grow tax deferred and distributions used to pay college costs are free from federal income taxes. You can open plans outside your state but first check if your state’s plan offers full or partial deductions or tax credits for contributions. Thirty-four states plus the District of Columbia do, and six states allow deductions for contributions to out-of-state plans: Pennsylvania, Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania.
Contribution limits are often above $250,000 but withdrawals can be used only for qualified higher education expenses such as tuition, room and board, mandatory fees and books.
Most plans have several investment options—usually different mutual funds—but some also include ETFs and CDs, and/or a guaranteed investment options. Starting this year investors can change portfolios twice a year instead of once.
For more about different 529 plans check out Savingforcollege.com’s latest rankings: 2014 plan performance rankings Q4.
3. Consider a Prepaid Tuition Plan
These plans lock in tuition costs at current levels, which can be a big benefit considering that college costs are rising every year—usually above the rate of inflation. Today tuition and fees for a private nonprofit four-year college average about $31,000, up 24% from 10 years ago and 66% from 20 years ago, after adjusting for inflation, according to the College Board. The increase is even more dramatic for four-year public institutions because of state funding cuts.
Tuition and fees today average $9,100, up 42% from 10 years ago and more than double the costs 20 years ago, after adjusting for inflation.