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College costs

17 September 2019

Embarking on the journey of higher education is an exciting but often financially daunting prospect. College costs can vary widely, and understanding how to navigate them is crucial for both students and their families.

Breaking Down College Costs

Tuition and Fees

Tuition is the most significant expense, covering the cost of instruction. Fees may include charges for facilities, technology, and student services. Public universities often have lower tuition for in-state residents compared to out-of-state or private institutions. However, private universities may offer more significant financial aid packages.

Room and Board

The cost of living on or off-campus, including housing and meals, constitutes a substantial portion of college expenses. These costs can vary depending on the location and housing options.

Books and Supplies

Textbooks, course materials, and supplies are additional expenses. Consider buying used books or exploring digital alternatives to minimize costs.


If studying away from home, transportation costs should be factored in. This includes travel to and from campus during breaks or visits home.

Personal Expenses

Miscellaneous personal expenses, such as clothing, toiletries, and entertainment, should be budgeted. Creating a realistic estimate helps in managing day-to-day costs.


Saving for College

Saving for college can seem daunting. However, there are ways to start early and spread the cost out over the years – not just through loans.

A 529 savings plan is a tax-advantaged account designed for education expenses. Contributions grow tax-free, and withdrawals for qualified education expenses are exempt from federal taxes. These plans are sponsored by states, state agencies, or educational institutions and come in two main types: prepaid tuition plans and education savings plans.


Education Savings Plan

Contributors (usually parents or guardians) can make after-tax contributions to the plan. There are no federal income tax deductions for contributions, but some states may offer state income tax deductions or credits. Funds within the 529 plan are invested, and the account value fluctuates based on the performance of the chosen investment options. Most plans offer a range of investment portfolios, allowing you to select a strategy based on your risk tolerance and timeline. It’s important to note, however, that under IRS rules, you can change your investment mix only two times per year.

Earnings in a 529 plan grow tax-deferred, and qualified withdrawals for educational expenses are tax-free at the federal level. Funds from a 529 plan can be used for qualified education expenses, including tuition, room and board, books, and certain other related costs at eligible institutions.

529 plans are flexible; you can change the beneficiary to another eligible family member without incurring taxes or penalties. If the intended beneficiary does not use all the funds or decides not to attend college, the account owner can change the beneficiary or use the funds for their own education.


Prepaid Tuition Plan

Prepaid tuition plans allow you to purchase tuition credits or units at today’s rates for use in the future. These plans provide a hedge against tuition inflation, and the credits can typically be used at in-state public colleges and universities. Prepaid tuition plans are generally limited to covering tuition and mandatory fees, excluding other expenses like room and board.


Similar to a 529 plan, a Coverdell ESA allows tax-free growth and withdrawals for qualified educational expenses. However, unlike 529 plans, which are sponsored by states, Coverdell ESAs are individual accounts that can be established at eligible financial institutions.

The maximum annual contribution limit per beneficiary is $2,000. Contributions must be made in cash and are not tax-deductible. Contributions to a Coverdell ESA are subject to income limitations. Eligibility to contribute phases out for higher-income individuals.

Coverdell ESAs can be used to pay for qualified education expenses at eligible educational institutions. This includes elementary, secondary, and higher education expenses. Funds from a Coverdell ESA can be used for K-12 education expenses, including tuition, fees, books, supplies, and equipment, as well as for qualified higher education expenses, such as tuition, fees, books, supplies, and room and board.

To ensure tax-free withdrawals, the funds must be used for qualified education expenses. If funds are withdrawn for non-qualified expenses, they may be subject to income tax and a 10% penalty. Funds must be distributed and used for qualified expenses before the beneficiary reaches the age of 30. Otherwise, the account may be subject to taxes and penalties. However, funds in a Coverdell ESA can be transferred to another Coverdell ESA for the same beneficiary without incurring taxes or penalties. Alternatively, the funds can be rolled over to the Coverdell ESA of a family member under the age of 30.


Tax Credits

The American Opportunity Tax Credit (AOTC) is a tax credit designed to assist eligible students and their families with the cost of higher education. It was introduced as part of the American Recovery and Reinvestment Act in 2009 and provides a tax benefit for qualified educational expenses incurred during the first four years of post-secondary education. The AOTC covers qualified tuition and related expenses paid for the taxpayer, the taxpayer’s spouse, or a dependent. The credit also includes expenses for required course materials, such as books and supplies, as long as those materials must be purchased from the educational institution as a condition of enrollment or attendance.

The credit is available for the first four years of post-secondary education. This includes undergraduate education and certain post-secondary vocational schools. Eligible students must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year. The credit is phased out for taxpayers with modified adjusted gross incomes (MAGI) above certain thresholds as set by Congress.

The maximum annual credit is $2,500 per eligible student. The credit is calculated as 100% of the first $2,000 of qualified expenses and 25% of the next $2,000, resulting in a total credit of $2,500 if the student incurs at least $4,000 in qualified expenses. Up to 40% of the AOTC is refundable, meaning that if the credit brings the amount of tax owed to zero, 40% of any remaining amount (up to $1,000) may be refunded to the taxpayer.

The AOTC cannot be claimed in the same tax year if the taxpayer claims the Lifetime Learning Credit or Tuition and Fees Deduction for the same student. It’s essential to consult with a tax professional or refer to the latest IRS guidelines for the most accurate and up-to-date information regarding the American Opportunity Tax Credit and its applicability to your specific situation.


Options for Loans and Grants

For most, loans will be a necessity to afford higher education – over 43 million Americans hold student loan debt. There are also opportunities for grants, work opportunities and scholarships that don’t require repayment. Understanding what kind of funding is available and what they entail is crucial to eventually paying loans back in a more reasonable timeline for you.

Federal Student Loans: Subsidized and unsubsidized federal loans are available for students, with subsidized loans offering interest-free periods while in school. Repayment typically begins after graduation.

Private Student Loans: Private loans from banks or credit unions may be an option for covering educational expenses. Interest rates and terms vary, so it’s crucial to compare offers and consider federal options first.

Grants: Federal and state grants, such as the Pell Grant, are need-based aid that does not require repayment. FAFSA (Free Application for Federal Student Aid) is the key application for grants.

Work-Study Programs: Federal Work-Study programs provide part-time employment opportunities for students, helping them earn money while gaining work experience.


Want more information on loan breakdowns? Check out our article explaining the ins-and-outs of student loans.

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