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College is a very large expense and if you have multiple kids going to school, it could end up costing more than your primary residence.  Unlike your primary residence, however, college is heavily discounted.

From financial aid to scholarships to regular old living expenses being repurposed, the very big expense of college can be taken care of…one bite at a time.

For today’s discussion, we will look at a series of bites you can take to cover the average cost of attendance for a public in-state university.  In 2019-2020, you can expect to pay about $26,000 per year.  That would be a total bill of $104,000 over four years.

Let’s break down each bite of this $104,000, shall we?

Bite 1 – The Tax-Advantaged College Savings Plan

The first step is creating and funding a college savings vehicle such as a 529 Plan as early as possible. In a 2018 Fidelity College Savings Study, they estimated that a family utilizing a 529 College Savings Plan on average has about $35,000 in savings.

Subtract this from that big, scary $104,000 and we have a balance of $69,000.

Bite 2 – Federal Direct Loans

The next place I like to look is the Federal Direct loans.  These used to be called the Stafford loans.

A student can utilize $27,000 over four years.  $5,500 as a freshman, $6,500 as a sophomore, and $7,500 as a junior and senior.  These loans may or may not be subsidized based on your FAFSA estimated contribution.  Either way, a student could expect to pay back $100 per month for every $10,000 borrowed.

This would mean roughly a $270 per month payment at graduation.  That is perfectly manageable for a recent grad with a degree.

Note that I am talking about federal student loans. These have much more generous repayment methods than private loans and often better interest rates as well (unless you have excellent credit).

Okay, now we are down to $42,000.

Bite 3 – The American Opportunity Tax Credit

The American Opportunity Tax Credit is a $2500 per year tax credit for taxpayers that have paid $10,000 or more to a college.  There are income limits for this credit: households with over $160,000 in adjusted gross income will not qualify.

I like to encourage families to not view this as a bigger tax refund but to diligently use this money towards college tuition.

Now we are down to $32,000.

Bite 4 – Using Money From Your Teen Moving Out

The next “bite” is actually quite literal.  Did you ever notice that your grocery bill got bigger and bigger as your kids grew up?  What about your water bill?

The Department of Agriculture says that it costs about $13,900 annually to raise a teenager between 15 and 17.  We understand that this number doesn’t disappear entirely when the child goes to school, but what if it went down by half?

That would be $6,950 that you could use for the room and board bill you will be getting from the college.  Over four years, this would add up to $27,800.  Wow!

We’ve now dropped all the way to a balance of $4,200.

Bite 5 – Don’t Stop Contributing to Your 529

Remember the Fidelity study that gave us the $35,000 529 plan balance?  They also found that those participants are adding about $5,300 per year.

This shouldn’t stop when the child goes to college.  Keep adding to that 529 plan.

With the additional 529 contributions, we have now covered the whole $104,000 balance in this scenario.

Many Other Bites

The path I have laid out above is by no means the only road you can follow. I have described many of the biggest bites you can take, but there are several others.

Need-Based and Merit-Based Aid

I didn’t even mention need-based aid—a topic that probably requires its own blog, perhaps its own book.

Even if you don’t qualify for need-based aid, you still have options. Maybe you are desperately trying to avoid loans. If so, it would probably be a good idea to focus on applying for scholarships early and often. And don’t just target the big scholarships. Those little ones add up and can be much simpler to obtain.

Maybe you divert funds that you would have spent on your children’s extracurricular activities, such as sports or music.  I have seen some families paying upwards of $10,000 per year for travel sports, music lessons, computer camps, etc.

Look, I understand that these are rough numbers and this whole thing is daunting, but it is possible to eat this elephant.  Ultimately, you just have to plan. Planning early on and dealing with the problem in bite-size chunks will prevent you from becoming completely overwhelmed.

Just take that first “bite” and give us a call!


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PJ Horan

Related Reading:

The American Opportunity Tax Credit: “The Tax Scholarship”

14 Ways to Minimize Student Loans

What Is a Tuition Discount?

Four Things to Do Before Taking Out Student Loans

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