Cost of Education

Saving for college is an important financial goal for many families. By starting early and choosing the right savings plan, parents can help ensure their children have the necessary resources to pursue their educational goals. With the right information and careful planning, saving for college can be a manageable and rewarding process.

The following college savings options may have tax benefits depending on your income and other factors. Be sure to consult a tax advisor for guidance.

529 Plans

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

Prepaid Tuition Plans (Prepaid 529 plans)

• Allows a saver or account holder to purchase units or credit at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices for the beneficiary.
• Typically, these plans don’t pay for future room and board at colleges and universities.
• Cannot be used to prepay elementary and secondary school tuition.
• Mostly sponsored by state governments and have residency requirements for the saver and/or beneficiary.
• If a beneficiary doesn’t attend a participating college or university, the plan may pay less than if the beneficiary attended a participating college or university.

Education Savings Plans (529 savings plans)

• Allows a saver to open an investment account to save for the beneficiary’s future qualified higher education expenses, including tuition, mandatory fees, and room and board.
• Generally, allows you to pay for above-listed expenses at any college or university, including sometimes at non-U.S. colleges and universities.
• Can also be used to pay up to $10,000 per year per beneficiary for public, private, or religious elementary or secondary school tuition.
• Allows a saver to choose among a range of investment portfolio options.
• These plans are sponsored by state governments, but only a few have residency requirements for the saver and/or beneficiary.

One of the benefits of 529 plans is the tax-free earnings that grow over time. If 529 account withdrawals are used for qualified higher education expenses (or tuition for elementary or secondary schools; education savings plans), earnings in the 529 account are not subject to federal income tax and, in many cases, state income tax. However, if 529 account withdrawals are not used for qualified expenses or tuition, they will be subject to state and federal income taxes and an additional 10-percent federal tax penalty on earnings.

Coverdell Education Savings Accounts

A Coverdell education savings account (Coverdell ESA) is a tax-advantaged trust or custodial account designed to pay for qualified higher education expenses and elementary and secondary education expenses.

The highlights of a Coverdell ESA are:

• If withdrawals are used for qualified higher education and elementary or secondary education expenses, earnings are tax-free;
• Contributions are not tax-deductible;
• Savers have broader investment options;
• Any individual with a modified adjusted gross income less than the limit set for a given tax year can contribute;
• The total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000; and
• Amounts remaining in the account must be distributed within 30 days after the designated beneficiary reaches age 30.

There are various types of financial aid available to help students pay for higher education expenses. It is essential for students to explore all available options and make informed decisions about how to finance their education.

Grants

Grants can come from the federal government or state government, a college or career school, or private or nonprofit organizations. Most types of grants, unlike loans, are sources of financial aid based on financial need and generally do not have to be repaid. However, there are certain scenarios that may require that a portion or all the grant funds be repaid. For example, if a student withdraws early from the program for which the grant was given, or if enrollment status changed from full-time enrollment to part-time.

Students and parents are encouraged to do their research based on their affiliations, apply for any eligible grants, and be sure to meet application requirements and deadlines. To apply for federal grants, start by submitting a Free Application or Federal Student Aid (FAFSA) form.

Scholarships

There are thousands of scholarships available to help students pay for college or career schools without paying it back. They are generally offered by schools, employers, individuals, private companies, nonprofits, communities, religious groups, and professional and social organizations. Let’s look at the different kinds of scholarships available:

• Merit-based – Merit scholarships are earned by meeting or exceeding certain standards set by the scholarship-giver.
• Need-based – Need-based scholarships are available to students with financial need.
• Particular groups of people – For instance, there are scholarships for women, minorities, or graduate students.
• Company-based – Some scholarships are available because of where the student or their parents work.
• Certain background – For instance, there are scholarships for military families.

Learning and understanding the different types of scholarships can make a real difference in helping students manage their education expenses. As some deadlines are as early as a year before college starts, students and parents should begin researching and applying for scholarships during the summer between their junior and senior years.

Federal Work-Study Program

Federal work-study program provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay for education expenses. The program encourages community service work and work related to the student’s course of study, both on and off campus.

The total work-study award depends on:

• When the student applies,
• The student’s level of financial need, and
• The school’s funding level.

Students will earn at least the current federal minimum wage. However, they may earn more depending on the type of work they do, and the skills required for the position. The program is administered by schools participating in the Federal Work-Study Program. Students are encouraged to check with the school's financial aid office to find out if the school participates.

Federal Student Loans

When applying for federal financial aid, students may be offered loans as part of schools’ financial aid offer. If students accept student loans, they are borrowing money to attend college or career schools and will have to repay the money with interest. Understanding responsibilities and repayment options is important so students can repay their loans successfully.

The U.S. Department of Education’s federal student loan program has four types of direct loans available:

Benefits of federal student loans include:

• Competitive interest rate
• No credit check or cosigner needed for most federal student loans
• Repayment not required until after a student leaves college or drops below half-time
• Based on financial need, the government may pay the interest while the student is in school
• Flexible repayment options and the ability to postpone loan payments
• Student loan forgiveness program

Complete and submit a Free Application or Federal Student Aid (FAFSA) form to apply for a federal student loan.

Private Student Loans

Private student loans are a type of financial aid that students can use to finance their education. They are offered by private lenders such as credit unions, banks, and state-based or state-affiliated organizations, and have terms and conditions set by the lender.

Private student loans can be used to cover tuition fees, room and board, textbooks, and other expenses related to education. They may have higher interest rates and less flexible repayment options than federal student loans. Still, private student loans may be a necessary option for some students to finance their education.

It's important to carefully consider the terms and conditions of any private student loans before deciding to borrow.

Once students graduate, drop below half-time enrollment, or leave school, their federal student loans go into repayment. However, most federal student loans have either a six-month or nine-month grace period based on the type of the loan before the repayment starts. Understanding the different repayment plans that are available and being proactive about communicating with your loan servicer is important for a smooth and successful repayment process.

The SAVE Plan

On June 30, 2023, the U.S. Department of Education announced a new and affordable repayment plan – the Saving on a Valuable Education (SAVE) plan. The SAVE plan is an Income-Driven Repayment (IDR) plan that will cut payments on undergraduate loans in half compared to other IDR plans, ensure that borrowers never see their balance grow if they keep up with their required payments, and protect more of a borrower’s income for basic needs. The SAVE plan replaces the existing Revised Pay As You Earn (REPAYE) plan, and borrowers already on the REPAYE plan will automatically get the benefits of the new SAVE plan.

The benefits of the SAVE plan will be particularly critical for low- and middle-income borrowers, community college students, and borrowers who work in public service. Although the SAVE plan is scheduled to go fully into effect on July 1, 2024, some parts of the SAVE plan will be implemented before the student loan payment pause ends in October 2023.

Changes coming in October 2023:

• The SAVE plan increases the income exemption from 150 percent to 225 percent of the poverty line. This means the plan can significantly decrease a borrower’s monthly payment amount compared to other IDR plans. For instance, if a borrower is single earning $32,800 or less or a family of four earning $67,500 or less, the borrower will not owe monthly loan payments.'
• The plan eliminates 100 percent of remaining interest for both subsidized and unsubsidized loans after a scheduled payment is made under the SAVE plan. This means if a borrower makes a monthly payment, the loan balance won’t grow due to unpaid interest – even when that monthly payment is $0 because their income is lower.
• The SAVE plan excludes spousal income for borrowers who are married, and file separated. This change removes the need for a spouse to cosign a borrower’s IDR application.

Changes to come in July 2024:

• For undergraduate loans, the SAVE plan will cut in half the amount that borrowers must pay each month from 10 percent to 5 percent of discretionary income above 225 percent of the poverty line.
• The SAVE plan will forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original principal balances of $12,000 or less, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed. For example, if a borrower’s original principal balance is $14,000, the borrower will see forgiveness after 12 years. Payments made previously (before 2024) and those made going forward will both count toward these maximum forgiveness timeframes.
• Borrowers who are 75 days late on their payments will be automatically enrolled in the SAVE plan if they have previously agreed to disclose their tax information to the Department.

Income-Driven Repayment Plans

If a borrower’s federal student loan payments are high compared to income, the borrower may want to repay the loan under an income-driven repayment (IDR) plan. IDR plans set student loan payments at affordable amounts based on the borrower’s income and family size. Under all four plans, any remaining balance will be forgiven if the federal student loans aren't fully repaid at the end of the repayment period.

The U.S. Department of Education also offers different types of repayment plans.

Before repayment begins, borrowers are encouraged to develop a plan that puts them on track to pay back their loans on time and in full.

Before repayment begins, create a budget using our Money Basics Guide to Budgeting and Savings.

Public Service Loan Forgiveness

If a borrower is employed by a government or not-for-profit organization, they might be eligible for the Public Service Loan Forgiveness (PSLF) program that could help them manage federal student loan debt. The PSLF program forgives the remaining balance on 1) Direct Loans after the borrower has made the equivalent of 2) 120 qualifying monthly payments under 3) an accepted repayment plan while 4) working full-time for 5) an eligible employer. The borrower should fill out and submit the PSLF form annually or whenever employment changes to ensure they are on the right track toward loan forgiveness.

1. Direct Loans: Any loan received under the Direct Loan program qualifies.
2. 120 Qualifying Monthly Payments: A qualifying monthly payment is one made while the borrower is employed full-time by a qualifying employer at any time during that month.
3. Accepted Repayment Plan: All the income-driven repayment (IDR) plans are accepted. The 10-year Standard Repayment Plan is also accepted, only if periods of qualifying deferments or forbearances are included in the 120 qualifying payments.
4. Working Full-Time: Full-time employment is working for a qualifying employer(s) for a weekly average, alone or when combined, equal to at least 30 hours during the period being certified. School teachers throughout a contractual or employment period of at least 8 months in a year are deemed to have worked full-time for the entire year. Unpaid volunteer work or services should not be included.
5. Eligible Employer: PSLF is not about your specific job but about who you work for.
   
   Eligible Employer
   • U.S.-based government organizations
   • Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
   • Other not-for-profit organizations that devote a majority of their full-time equivalent employees to providing certain qualifying public services
   Ineligible Employer
   • For-profit organizations
   • Labor unions
   • Partisan political organizations

A borrower who is eligible for the PSLF program should submit a PSLF Form. Once the PSLF servicer – not the borrower’s loan servicer – confirms the borrower’s eligibility, the loans will transfer to the PSLF servicer, and the borrower can find out how many qualifying payments have been made.