We hear a lot about how college is expensive, but many folks don't realize quite how costly a degree can be these days. According to the College Board, the average cost of tuition and fees for the 2016-2017 school year looked something like this:

  • $9,650 for in-state public colleges
  • $24,930 for out-of-state public colleges
  • $33,480 for private colleges

Of course, that's just one piece of the puzzle. Room and board -- an oft-necessary component of college attendance -- averages $10,440 at public colleges and $11,890 at private ones.

When we look at these costs, it's easy to see why so many low- and middle-income families struggle to pay for college. But for a large number of higher earners, most universities are out of reach as well. According to research by the Institute for Higher Education Policy (IHEP), even families earning over $100,000 a year can't afford nearly 60% of U.S. colleges.

College application


Now IHEP defines affordability as the means to pay for college after saving 10% of one's discretionary income for the 10-year period leading up to college, combined with earnings from a student working 10 hours per week during college. Given that most folks are advised to save 10% of their income for retirement, setting aside another 10% for college is a pretty tall order. It's therefore demoralizing to learn that even those who manage to hit that threshold still wind up falling short in terms of being able to afford most learning institutions.

That said, just because some folks might very well be saving 10% of their income for college doesn't mean that they're saving in the most efficient manner possible. And that could spell the difference between affording college or winding up with a ridiculous pile of debt for privilege of having a child attend the university of his or her choice.

Find a smarter way to save

While setting aside money for college is a smart move off the bat, where you put that cash could have a huge impact on your eventual ability, or lack thereof, to pay those bills. Fidelity Investments reports that about 40% of families are now saving for college via a 529 plan, which represents an increase from previous years. And while 529s are by no means the only option for saving for college, they're a far more efficient route than savings and traditional brokerage accounts.

Though you don't get an immediate federal tax break for contributing to a 529, once you fund an account, that money gets to grow tax-free. As long as you use that money for qualified higher education purposes, you'll get to keep your ending balance in full.

Traditional brokerage accounts, by contrast, require you to pay taxes on your gains year after year. This means that if you sell anything in your account at a profit, you'll lose a chunk of those proceeds to taxes, leaving you less money to reinvest. Along these lines, if you leave your investments alone during your college savings period and only sell them off once the time comes to start tacking those tuition bills, you'll lose a portion of your eventual earnings to taxes as well.

Then there are savings accounts, which not only impose taxes on interest income but offer very little in the way of returns to begin with. These days, you'll be lucky to get a solid 1% per year out of your savings account, making it a rather inefficient tool.

Imagine you earn $100,000 a year, and sock away 10% of that, or $10,000 annually, for 10 years. With a regular old savings account, you'll grow your college fund to roughly $104,000 -- not all too impressive considering that $100,000 of that stems from principal contributions.

On the other hand, if you save in a traditional brokerage account or 529, your investments might very well generate an average annual 7% return, which would leave you with $138,000 after 10 years' time. Here's the catch though -- if you have a traditional brokerage account whose investments you sell off to access that cash, you'll lose a portion of your earnings to capital gains taxes. Assuming you're in the 25% bracket, those taxes will knock a good $10,000 off your $38,000 in gains. With a 529, however, you'll get to use that $138,000 in full, as long as it's applied to qualified college costs.

Now one major drawback of opening a 529 is that if you don't end up using that money for qualified purposes, you'll face a 10% penalty on the gains portion of your account. It's for this reason that you might consider other college savings avenues, like a Roth IRA, if you're eligible to open one. (Even if you can't fund one directly, you can always convert a traditional IRA to a Roth.)

No matter how you decide to save for college, you should do so in a manner that lets you maximize your gains and minimize your taxes. Even if you're a relatively high earner, covering the cost of college is likely to be a challenge, so the smarter you are about how you save, the better your chances of meeting your ultimate goals.