September is National College Savings Month, and it’s also a time full of excitement and promise — a new school year, new classes and classmates, weekend football. Unfortunately, September is also a time when the promise of new education debt looms large.

A college graduate with a bachelor’s degree will earn nearly twice as much on average as someone with a high school diploma. Those with a professional degree will earn nearly three times as much.¹ This promise of a brighter future is likely why 62% of the students who graduate from high school each May are enrolled in higher education for the following fall semester.² It’s also why, according to Sallie Mae, over 90% of high school graduates at least plan to continue their education.³

Paying for college is probably one of the largest expenses a family will incur over the course of their student’s life. According to the College Board, the average four-year, in-state, public institution costs more than $27,000 per year — an increase of over 25% from just a decade ago.⁴ Most families plan to use a combination of funding methods to pay for college, but their expectations and reality don’t seem to align. The charts below show the difference between funding expectations and funding realities:
 

According to studies, families expect to pay for over 40% percent of college costs using scholarships, grants and other “free money” sources. However, data shows that only about 28% of college funding is actually coming from those sources — a difference of 13%. Given all the headlines and attention focused on snowballing student debt, it would be logical to conclude that people would be borrowing to cover college expenses. However, the data suggests that our 13% gap is actually being filled by family income and savings, not borrowing. In fact, on average, the percentage of funding that comes from family income and savings is nearly 17% more than expected. Moreover, families are paying nearly 20% more from income and investments than they were just a half-decade ago.⁷  

 
Understanding this difference between perception and reality is valuable in developing a plan to pay for education. According to Sallie Mae, the use of education savings accounts like 529 plans is on the rise — increasing from 21% in 2018 to 33% in 2022.⁸ However, those percentages also mean that most people are still paying for college using other, perhaps less advantageous, means.

Aside from being the only vehicle designed specifically for covering higher education expenses, a 529 plan offers many benefits, including the opportunity for tax-deferred investment returns, which allow for greater compounding. 529 funds can then be used tax-free to pay for qualified higher education expenses, both in-state and out-of-state, at public or private institutions. And expenses can include items like tuition, fees, room and board, as well as required equipment. Furthermore, recent changes have also allowed for qualified expenses related to apprenticeship programs,⁹ and even the repayment of student loan balances.¹⁰

To aid in planning, families may want to explore using 529 calculators, including an expected family contribution (EFC) calculator, to develop a personalized estimate of the amount they may have to pay for higher education. The EFC is the result of the Free Application for Federal Student Aid (FAFSA) process that is used to determine federal financial aid eligibility. The FAFSA gathers information about a family’s income and assets and calculates the EFC, which is then subtracted from the cost of the institution — and that determines the student’s financial need. A family that isn’t prepared to pay their EFC is likely to dip into other investments, use an increased portion of current income or increase borrowing to cover the shortfall. This can cause the family to delay or even forego other financial goals. Understanding the EFC — and saving enough to cover at least that amount — may go a long way toward providing greater peace of mind when planning for education costs. 

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