The College Conundrum: Saving for Higher Education Costs

By Heather Conway, J.D. – Vice President & Relationship Manager

Chances are, you have a child or grandchild who will be attending college in the near (or not so near!) future. Along with bright hopes for the next chapter comes a common concern: how will the costs of post-secondary education be paid? Personally speaking, I find myself at a crossroads of just finishing off paying for my juris doctorate – after 15 years – and looking for the best tools to save for my sons’ (ages 3 and 6) educational futures. Now that potty training is in the rearview mirror, college costs are front and center.

First, the statistics.

Sallie Mae’s publication, How America Pays for College 2023, is a good starting point. According to this study, in academic year 2022-2023, American families spent an average of around $28,000 per year on undergraduate college expenses, an increase of 11% from the prior academic year. Of this cost, parents provided about 40% through their income and savings. The remaining sources included scholarships and grants (29%), student borrowing (11%), student resources (10%), parent borrowing (8%) and assistance from family and friends (2%). In addition, thirty-eight (38%) of undergraduate families report that their student will continue to pursue an advanced degree. That means more savings and potentially more borrowing. But according to the Economic Policy Institute, it’s worth it: college graduates earned 76% more than high school graduates in 2017. Put another way, over their lifetime, college graduates will earn $2.1 million while high school graduates earn $1.2 million.

I determined that I have two main savings routes – one is to continue to fund retirement accounts with pre-tax dollars with an eye toward using that money in part for college expenses. The other is to set up a special fund, such as a 529 college savings plan.

For the reasons outlined below, I chose to go with the latter.

529 College Savings Plan

A 529 plan – authorized by Section 529 of the Internal Revenue Code – is a tax-advantaged savings plan designed to fund future education costs. Earnings on contributions made to the savings plan grow tax-free and, if used to pay for qualified education expenses, withdrawals are tax-free. Qualified education expenses include your traditional college tuition, books, supplies and equipment, but can also cover things such as accredited apprenticeship programs, K-12 private tuition and repayment of student loans (up to a certain amount). Most states also offer a state income tax deduction for contributions made by state residents. For example, in Missouri, residents may deduct up to $8,000 per person, or $16,000 if married and filing a joint return.

While the IRS does not set a cap on 529 contributions, the sponsoring state generally does. In Missouri, the current limit on contributions per beneficiary (child) is $550,000 over the life of the plan. In addition, if the annual contribution made by a donor is less than the gift tax exclusion amount for that taxable year, there is no gift tax reporting requirement.

Of course, life does not always follow the path we imagine. What if the student decides not to pursue higher education? In lieu of cashing out the 529 and paying taxes and penalties on the distribution, an account holder can change the beneficiary to a different family member. Or, thanks to the Secure 2.0 Act, beginning in 2024, account holders can roll a portion of the 529 fund into a Roth IRA. The bottom line is that there are options, and the benefits of having a funded 529 plan outweigh the possible changes in life circumstances.

Last year, I established Missouri MOST 529 plans for my sons. There was no minimum contribution amount required, and to make things easier I established an automatic monthly withdrawal from my bank account to each 529 plan. And it was simple to invite family members to contribute as well, through the MOST’s Ugift program. All I had to do was share a unique code with my parents and inlaws so they could make contributions to the right account.

Parenthood can be terrifying. Thinking about paying for college can also be terrifying. But making a savings plan is imperative, and the earlier the better.