Are You Ready for the Rising Costs of Tuition?

According to the College Board’s 2016 Trends in College pricing document, in the 2018-2019 school-year, the average yearly cost of a 4-year public university is $27,132 and the average yearly cost of a 4-year private school is $54,375. During the 2025-2026 schoolyear, however, the average yearly cost of college will rise to $38,178 for 4-year public institutions and $76,511 for 4-year private schools based on an assumed annual price increase of 5%.

While many families utilize student loans and other forms of financial aid, saving for college is the key to having a successful college financing plan. It’s important to start saving for college as soon as possible because a college education might be the biggest purchase you ever make.

Unsure where to start? Here is some information about two of the more common college savings plans, 529s and Roth IRAs, and what to consider when choosing the plan.

With a 529, your contributions grow tax deferred. Withdrawals are tax free at the federal level if the money in the 529 is used for education expenses. If the use is not a qualified education expense, however, earnings are subject to taxation as ordinary income.

529 plans offer two plans- a college savings plan and a prepaid tuition plan. The college savings plan is the more popular of the two. The college savings plan lets you direct your contributions to one or more of the plan’s investment portfolios. The prepaid tuition plan lets you purchase tuition credits at today’s prices for use at specific colleges in the future. Participation isn’t restricted by income level in either plan and lifetime contributions are high. 529 plans are considered as an asset under federal and college aid formulas and may decrease the amount of financial aid a student receives.

While Roth IRAs aren’t technically college savings plans, many parents utilize Roth IRAs to save and pay for college expenses. Contributions to a Roth IRA are always tax free and can be withdrawn at any time. For parents older than 59 ½, the earnings withdrawal is tax free if the account has been open for at least five years. For parents younger than that, a withdrawal of earnings is not subject to the usual 10% premature withdrawal policy if the withdrawal is used to pay for college expenses. However, parents younger than 59 ½ who use a Roth IRA account to pay for their child’s college expenses may be liable to pay income tax on the amount of money withdrawn. Funds from a Roth IRA used to pay for college expenses aren’t counted as assets in determining financial aid, unlike 529 plans.

Unlike a 529 plan, people who wish to contribute to a Roth IRA must have an income below a certain threshold to make the maximum annual contribution of $5,500 (or $6,500 for people aged 50 and older).