You'd think the college bubble would've burst by now, or at the very least deflated. But new data from the College Board tells the opposite story -- namely, that tuition prices rose again in 2017, and at a rate that continues to outpace inflation.
The average annual cost of tuition climbed $300 at public four-year colleges for in-state students, and it rose by $800 at private universities. And while those might not seem like such hefty increases, consider this: For in-state tuition at a public college, students are now looking at a total bill of $20,770 for tuition, room and board, and fees. Meanwhile, the median price for full-time students attending private nonprofit four-year colleges is $35,260. Ouch.
Obviously, this paints a pretty bleak picture for college hopefuls and their families who will have to bear the brunt of these outrageous costs. If you're worried about affording college, here are two efficient savings options to consider.
Open a 529 plan
Though 529 plans do come with certain restrictions, they're becoming an increasingly popular means of saving for college. In fact, since 2007, there's been a 62% increase in 529 plan usage, and as of 2016, 41% of families who are actively saving for college are doing so in 529s.
The benefits of 529s are multifold. Though you don't get an immediate tax break on the money you put into a 529, those contributions get to grow on a tax-free basis. That means that if you earn $20,000 in gains over the course of your investment window, you won't lose any of that money to taxes -- provided, of course, that it's used for qualified higher-education purposes. If you invest in a traditional brokerage account, you'll be liable for taxes as soon as gains in your portfolio are realized.
Furthermore, some states offer tax deductions or credits for contributing to a 529. And, you don't need to open a 529 sponsored by your home state -- you can choose the plan that best meets your needs, regardless of where you live.
Of course, the downside of 529s is that you'll face a 10% penalty for withdrawing funds for non-college purposes. That said, you won't be penalized on your entire balance, but rather, just the earnings portion of your account. This means that if you put in $90,000 of your own money and it grows to $120,000, that original $90,000 is protected, regardless of what you do with it.
Save in a Roth IRA
Another college savings option to consider is the Roth IRA. Like a 529, you don't get an immediate tax break for funding a Roth IRA, but your money gets to grow tax-free.
The benefit of saving in a Roth IRA is that you get more flexibility than with a 529. If you save in a Roth IRA and your college costs come in lower than expected, you can always keep your money where it is and use it in retirement. Once you turn 59 1/2, you can access your entire Roth IRA balance, earnings included, without penalty.
The problem with Roth IRAs, however, is that not everyone is eligible. For the current tax year, you're barred from opening a Roth IRA directly if you earn more than $133,000 as a single tax filer, or more than $196,000 as a married couple filing jointly. For the 2018 tax year, these limits are increasing to $135,000 and $199,000, respectively. Of course, what this does mean is that the average U.S. household is eligible for a Roth, and those who aren't can always go the backdoor route.
Another thing you should know is that Roth IRA contributions max out at $5,500 a year for savers under 50, and $6,500 a year for those 50 and over. If your goal is to fund an education for multiple children, these limits might be too restrictive, even with extremely aggressive investment growth.
So which option is better? At the end of the day, there's nothing to stop you from saving for college using both a 529 and Roth IRA. The key is to pick a savings vehicle that's more tax-efficient than a traditional brokerage account, and that offers better growth than a regular savings account. After all, with college costs going nowhere but up, it pays to use every available tool in your arsenal to get as close as possible to meeting your goals.
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