How to Pay for College [12 Ways to Save for Tuition + More]

College can enrich your child’s life, but you might feel broke when your kid first enrolls. The thought of sending your child to college can make you feel proud and excited, but the question of how to pay for college can make you feel worried or even instill a sense of dread.

There is no need to sugarcoat it: College is expensive. For some families, it can be very, very expensive.

That’s why it’s essential to plan and take advantage of all the options available to you. There isn’t one single answer for how to pay for college, but rather multiple avenues you should take advantage of to the fullest. The more methods you use, the less student loan debt your child will be burdened with.

Let’s dive into various strategies for how to make college financially feasible.

The Cost of College (For Now)

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Although the inflation-adjusted average for tuition and fees has dipped a bit over the past couple of years, the cost of college still remains daunting. According to the College Board, the advertised annual tuition and fees for a full-time undergraduate student at a four-year college during the 2022-23 school year averaged out to:

• $10,940 at a public, in-state college
• $28,240 at a public, out-of-state college
• $39,400 at a private nonprofit college

And that doesn’t include room and board. For students living on campus, tack on an average of $12,310 for a dorm room, meal card, and other related expenses at a public college. Private college costs for room and board averaged ,030 per year.

When you add it all up, the average combined total for annual tuition, fees, and living expenses for a full-time undergraduate student at a four-year college during the 2022-23 school year was:

• $23,250 at a public, in-state college
• $40,550 at a public, out-of-state college
• $53,430 at a private nonprofit college

No doubt these figures cause some sticker shock for parents and students alike. A 2021 survey by Fidelity Investments found that about 25% of high schoolers’ parents and 38% of high school students believed a year of college only costs $5,000 or less. So, you can imagine their reaction when they discovered the actual cost.

Parents might also be used to college costs from decades ago. However, those costs are way out of date. According to a recent study by Georgetown University’s Center on Education and the Workforce, the average price for undergraduate education—including tuition, fees, room, and board—rose 169% from 1980 to 2019.

Best Ways to Pay for College

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The question is: How do you pay for these higher costs? Well, my advice is that there’s no single way to go about it—instead, you should take advantage of several vehicles that are available for college savers.

1. 529 Plans

529 plans are special tax-advantaged investment accounts for kids and adults saving for qualified education expenses. The account allows you to contribute after-tax dollars that grow tax-free if used to pay for qualified education expenses for a designated beneficiary.

These investment vehicles are set up to defray the costs of formal education (keeping your child from piling up student loan debt) and have minimal impact on your financial aid eligibility. You’ve got two options for 529 plans:

• College savings plans: These accounts work much like a Roth IRA, allowing you to invest after-tax dollars into mutual funds and other investment options. Your contributions grow tax-free, but how much they grow will depend on the performance of the investment options you choose to hold in your account.
• Prepaid tuition plans: Prepaid tuition plans allow you to pay all or part of your public in-state college education costs in advance. Generally, you can also convert the money to go toward a private or out-of-state college, as well.

529 college savings plans offer a more limited universe of investment options than joint brokerage accounts, custodial accounts, or individual retirement accounts (IRAs). Most offer access to mutual funds administered at the state level, meaning each state offers different investment options. However, you can choose to invest in any state’s 529 plan and still use the proceeds to send your child to a college in a different state. However, if you save in another state’s 529 plan, you might miss out on valuable state tax deductions or credits.

529s with Backer

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• Available: Sign up here
• Price: Flat fee of $1.99 per contribution

A great 529 plan option to consider is Backer. Backer—a hassle-free 529 savings plan where your family and friends can play a role—has helped families save more than $30 million toward college in just minutes.

You can use the 529 plan to put your child on track to afford college while remaining invested in assets that will grow over time. Backer allows you to invest in a portfolio of low-cost index funds that track major indexes of large-company stocks (S&P 500), small-cap stocks (Russell 2000), international company shares (MSCI EAFE Index), and U.S. government bonds (Barclays Aggregate Bond Index).

Interested in learning more or signing up? Visit Backer today.

Related: What to Do With Unused 529 Funds [5 Tax-Saving Options]

2. Coverdell Education Savings Accounts (ESAs)

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A Coverdell education savings account (ESA) is a custodial account or trust created to pay for a designated beneficiary’s educational expenses.

Coverdell ESAs are lesser-known than 529 savings plans, but work similarly. They also offer tax-free earnings growth and tax-free withdrawals, as long as the funds are spent on qualified education expenses.

However, the benefit doesn’t apply only to higher education expenses. Qualified elementary and secondary expenses count, as well. Also, you can use funds from a Coverdell account for a broader range of expenses related to K-12 education than you can with 529 funds.

The account must be established prior to the beneficiary becoming an adult, unless the recipient has special needs. Contributions must be made in cash and aren’t tax-deductible. Total contributions to the beneficiary can’t exceed $2,000 in any given year.

Related: What Is a UTMA Account? [Investing For Your Child’s Future]

3. Custodial Accounts

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Custodial accounts are run by an adult custodian (often a parent) for a beneficiary (usually a minor child). While the custodian can invest the money in the account, the funds legally belong to the child. The child gains control of the account once he or she reaches the age of majority for their state, which is typically when they turn 18 or 21 years old.

Withdrawn money must be used in ways that benefit the child, but there are many, many possible uses. One popular use of funds is for the child’s college costs.

However, if the funds don’t go toward paying for college, that’s fine, too. There are no penalties for using the money in a custodial account for something else that benefits the child. Then, once the child takes over the account, the funds can be used for any purpose at all.

There are no limits on how much you can contribute to a custodial account, but you probably do not want to exceed the annual federal gift tax exclusion. For 2023, the limit is $17,000 ($34,000 for married couples filing a joint tax return). If you exceed the limit, you need to tell the IRS and you might have to pay gift tax on the amount (although in most cases, you won’t owe any tax at that time). The IRS will also deduct the excess amount from your lifetime estate and gift tax exemption, which is currently $12,920,000 ($25,840,000 for married couples).

YATI Tip: Both the annual exclusion and lifetime exemption are adjusted annually for inflation.

You’ll also have to pay capital gains taxes on any assets held in a custodial account if those assets are sold.

Custodial accounts with EarlyBird

• Available: Sign up here
• Price: $2.95/mo. for one child, $4.95/mo. for families with 2+ children

EarlyBird is a mobile app that allows parents and guardians to set up a UGMA custodial account, where they can quickly start investing for their children.

This app provides a convenient and inexpensive way to gift money to a child. Family and friends can even record videos to go along with their financial contributions—a level of personalization that make these moments last a lifetime.

EarlyBird allows you to choose from five strategic ETF-only portfolios, with investing goals ranging from conservative to aggressive, based on your stated risk tolerance and overall investor profile.

Consider opening an EarlyBird account today and receive $15 to get you started after opening your account.

Related: Roth IRA for Kids: Can I Open a Custodial Roth IRA for a Child?

4. Roth IRAs

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Roth IRAs are designed primarily for retirement savings, but there are other ways to take advantage of the tax-free growth they offer—including saving for college.

Like 529 plans, a Roth IRA investment account is funded with after-tax money and the earnings grow tax-free in your account. You can take the contributions out at any time, but withdrawing any earnings the account generates before age 59½ or before you’ve had the Roth IRA for at least five years typically results in a 10% penalty, plus applicable income taxes.

However, there are a few exceptions to the penalty rules. One of them allows you to withdraw any amount from a Roth IRA to pay higher education expenses for yourself, your spouse, your child or grandchild, or your spouse’s child or grandchild. For this reason, Roth IRAs are sometimes used to save for college.

As with 529 plans, money from a Roth IRA can be used penalty-free for such things as college tuition, fees, books, room and board (the student must be enrolled at least half-time), certain technology (such as a computer), and equipment for special-needs students. It can’t be used for student loan payments or K-12 tuition.

Roth IRA contribution limits

Roth IRA contributions for the year can’t exceed the account holder’s “earned income” for the year. According to the IRS, earned income includes “wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services.” For example, if your child earns $2,000 in a calendar year from working a part-time job, you can’t contribute more than $2,000 to his or her Roth IRA that year.

There’s also an annual contribution limit based on your age (the limit is adjusted annually for inflation). For 2023, the most you can put in a Roth IRA is $6,500 if you’re under 50 years old at the end of the year. If you’re 50 or older by Dec. 31, 2023, you can put in up to $7,500 for the year.

When is a Roth IRA better than a 529 plan?

If you’re not sure your child will attend college, then saving for college with a Roth IRA might make more sense than with a 529 plan. That’s because you can just keep the money in the account and let it continue to grow tax-free for retirement if you don’t end up using the money you saved for your child’s college education.

Roth IRAs with SoFi Invest

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• Available: Sign up here
• Price: No annual or opening fees; $20 closing fee

SoFi offers many perks to its customers, including no annual or opening fees on many different account types. Its SoFi Invest Roth IRA could be a good choice if you’re an existing SoFi customer.

SoFi offers two options catering to different investment styles. Its active investing option lets you choose and manage your own investments. And with its automated investing option, SoFi will select and manage investments on your behalf. You won’t pay management fees with either account option, and SoFi doesn’t charge commissions for stock or ETF trading. Several other investment choices are also available, including options and margin trading. However, underlying fund fees may apply depending on the investments you choose, and you will have to pay a modest $20 fee to close your account.

Related: SEP IRA vs. Roth IRA: What’s the Difference?

5. Taxable Brokerage Accounts

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Taxable brokerage accounts can be a useful way to pay for college because they typically have the most investment options. These accounts also have no contribution limits. Unfortunately, unlike several other college savings options, a taxable brokerage account doesn’t have any tax advantages.

Invest and trade with Schwab

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• Available: Sign up here
• Best for: Intermediate investors
• Platforms: Desktop (Thinkorswim only—PC and MacOS), web, mobile app (Apple iOS, Android)

Charles Schwab is one of the top online brokers, offering commission-free stocks, ETFs, as well as thousands of mutual funds from Schwab Mutual Fund OneSource, and even Treasury trades—not to mention one of the widest assortments of investment selections you can find.

Schwab offers stock screening, third-party investment research, market commentary, education, alerts, and more. And through the Thinkorswim trading platform, traders enjoy a highly customizable interface, advanced charting and screening, Level II quotes, even access to a trading community to share ideas and strategies. Meanwhile, the web interface is clean, clearly labeled, and easy to navigate, while the mobile experience is smooth and still plenty rich in the basic features most investors need.

Interested in investing or trading with Schwab? Sign up through our link today.

Related: 11 Education Tax Credits and Deductions for 2023

6. Fill Out the Free Application for Federal Student Aid (FAFSA)

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The Free Application for Federal Student Aid (FAFSA) is essential for anyone considering using federal aid to pay for college. Only skip this form if your family can completely pay for college without any help.

The FAFSA calculates the parents’ income and assets to determine the Student Aid Index (SAI) and the student’s federal aid eligibility. The FAFSA Simplification Act, which took effect with the 2024-25 award year, changed the term from expected family contribution (EFC) to Student Aid Index. For the most part, one’s SAI will be calculated very similarly to the earlier system, with just a few small changes.

Usually, FAFSA opens up on Oct. 1, but it’s expected to be delayed this year to sometime in December, with the specific date still unknown.

As Mike Ramirez, manager of financial planning and certified college planning specialist at EP Wealth Advisors’ San Diego office, explains, “The window got pushed back because they’re implementing a new FAFSA. It’s being consolidated to a maximum of 36 questions from 108 previously as a result of the FAFSA Simplification Act. But in short, it typically will open up during fall or winter of a high schooler’s junior year.”

There’s a common misconception that FAFSA is only for people who want financial need-based aid. Perhaps surprisingly, many universities also use it as a way to award merit-based aid.

A student may have a perfect GPA and great scores on every test the College Board administers, but as Ramirez reveals, “Some schools simply won’t award any merit-based aid until they have a FAFSA on file. And a lot of college financial aid is awarded on a first-come first-served basis. We try to gently push our clients to submit the FAFSA as close to that window as possible.”

If your kid is rounding third and sliding into college graduation soon and hasn’t filled out the FAFSA, that’s not an ideal situation. You probably won’t get any merit-based aid this late in the process. But it could still be worthwhile to fill it out because you’d at least be eligible to borrow from the federal government.

In short, FAFSA opens up numerous financial aid options, such as scholarships, grants, student loans, and work-study opportunities (discussed below). Around one to three months after receiving FAFSA information, a school sends out a student’s financial aid award letter.

Related: How Much to Save for Your Kid’s College [3 Tax-Smart Options]

7. Scholarships

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Scholarships are financial aid awards for students to pay for college costs. Usually, these are merit-based awards.

Students can apply for both public scholarships and private scholarships. Public scholarships come from a state, federal, or other publicly funded agency. Private scholarships are funded by private entities, such as companies, foundations, nonprofit organizations, service groups, and individual philanthropists.

A great way to start a student’s scholarship search is to talk to a guidance counselor at school. The university a student is going to attend is another excellent place to contact.

Finding and applying for scholarships can be a time-consuming process, so some high school and college students use apps to streamline the process. Scholly is one of today’s top scholarship apps. It has helped students win over $100 million in scholarships.

Related: Student Loan Interest Deduction: How Much, Eligibility + More

8. Grants

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A grant is another type of financial gift used to pay for college expenses. Grants are similar to scholarships and these terms are often used interchangeably. One difference is that grants are typically based completely on financial need. Often, grants are offered by federal and state governments. Usually, you have to fill out the FAFSA to qualify for governmental grants.

Related: How to Give Stocks as a Gift in a Tax-Efficient Way

9. Student Loans

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Unlike scholarships or grants, students have to pay back student loan money because, well, it’s a loan. A student loan accrues interest that needs to be paid back, as well. Students can get federal student loans, private student loans, or both.

Federal student loans

Federal student loans were created by the federal government and the U.S. Department of Education is the lender. There are four types of Direct Loans, including:

• Direct Subsidized Loans (eligibility based on financial need)
• Direct Unsubsidized Loans (eligibility not based on financial need)
• Direct PLUS Loans (for graduate students, professional students, and parents of undergraduate students)
• Direct Consolidation Loans (combines all eligible federal student loans into a single loan with one servicer)

The U.S. Department of Education pays the interest on subsidized federal student loans while the student is in school or during periods of loan deferment. By contrast, an unsubsidized student loan accrues interest during school, deferment, and any grace periods.

Private student loans

Private student loans are usually issued by a bank or other financial institution, such as College Ave Student Loans. Private loans typically require the borrower to either have a good credit score and reliable income, or a co-signer who has both.

The interest rate for private loans tends to be higher than on loans from the federal government. This type of student loan has lower borrowing limits, too.

While most lenders let borrowers defer payments until they are done with school, some want small, interest-only or fixed payments right away. A private student loan usually accrues interest daily if payments are deferred, which means that when repayment starts, the interest is added onto the loan total.

For all of these reasons, federal student loans are considered the preferable option. Still, a private student loan can be helpful for anyone who has already maxed out federal loans.

Related: 9 Best Credit Cards for Students with No Credit [Building Credit]

10. Work-Study Programs + Part-Time Jobs

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Work-study is need-based, part-time employment in which the government and employer share the payroll cost of employing the student. Besides that, it functions the same as any other job where the student works in exchange for pay. Often, campus jobs will give preference to applicants who qualify for work-study, but will still be open to hiring any qualified applicant.

Working during college can help reduce the amount of financial aid a student needs. Many students are able to balance earning college credit while taking part in a work-study program or working a traditional part-time job. Students might work a campus job, such as at libraries or cafeterias, or work off-campus jobs in the surrounding community. Working a full-time job probably isn’t a good idea, as that might negatively affect academic performance.

Related: 26 Best Online Jobs for Teens [Earn Money at Home, Age 13+]

11. Work for an Employer That Pays for College

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Some companies offer employees tuition reimbursement or tuition assistance as part of their benefits package. This benefit can help attract top job applicants and reduce employee turnover.

Plus, tuition reimbursement is tax deductible up to the annual limit. Currently, there is a $5,250 annual cap that an employer can contribute toward education expenses before the assistance is treated as taxable income.

A student might be able to avoid taking out a student loan entirely with this assistance, or she might need a smaller loan because of it. Anyone who plans on attending college can benefit from this perk. Overall, it’s a win-win for both employers and employees.

Related: 6 Best Investing Apps for College Students to Start Investing

12. Educational Tax Credits + Deductions

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Educational tax credits help with college costs by lowering the amount owed on your tax return. For some people, it reduces their tax liability to under zero and they get a refund. The two types of educational credits are the American opportunity tax credit and the lifetime learning credit.

Note that to be able to claim an education credit, you must meet all of the following criteria:

• You, your dependent, or a third party pays qualified education expenses.
• The eligible student is enrolled at an eligible educational institution.
• The eligible student is either yourself, a dependent listed on your tax return, or your spouse.

There are additional rules for each specific type of credit.

Related: Federal Tax Brackets and Rates

How to Lower Tuition Costs

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Choose an Affordable School

Not all higher education costs the same. Some schools are vastly more expensive than others. For example, private colleges tend to cost more than public colleges. Additionally, it’s usually less expensive to attend an in-state school than one in another state.

Go to Junior College for Two Years, Then Transfer to a Four-Year University

Community college classes are almost always more affordable than those at a four-year university. Some people save a significant amount of money by beginning their college careers at junior colleges before transferring to a four-year public university. If you take this route, just make sure ahead of time that the credits from your junior college will transfer.

Get Roommates to Lower Room and Board Costs

Tuition isn’t the only expense college students face. While some students can continue living with their parents, many need to find housing of their own. Getting roommates can substantially lower room and board costs.

Another option to save on living costs is to apply to be a resident assistant (RA). Resident assistants are students older than freshmen who live for free in the dorms in exchange for supporting dorm residents in various ways.

Paying for College: FAQs

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When do I start applying for scholarships?

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Scholarships have varying deadlines. Some scholarship applications are due a year before college starts, so it can be strategic to start applying for scholarships between your junior and senior years of high school. Don’t worry if you didn’t start that early, though; many other scholarships have later deadlines.

How many scholarships can you apply for?

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There is no limit to the number of scholarships a person can apply for, so it’s usually wise to apply to any programs for which you meet all of the eligibility requirements. The more scholarships you earn, the less you will spend later on student loan payments. Your future self will thank you.

Some scholarships are worth thousands of dollars, while others award smaller amounts. Oftentimes, the lower the amount of the award, the less competition you face.

What is the FAFSA deadline?

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The FAFSA deadline is typically June 30. For example, the 2023-24 form can be submitted as late as June 2024, but students who wait that long would only be eligible for a federal student loan for summer classes. However, some state and college deadlines might be earlier, so it’s important to check the information for the specific school you or your child wants to attend.

I strongly suggest filing as early as possible to improve your chance of receiving financial aid.