Janice Lozano
The cost of college is a significant financial burden for many families, and it is often a combination of sources that fund a student's education. While the government considers it the parents' responsibility to pay for college, and 77% of American families use parental income and savings to contribute to their child's college expenses, many students also work part-time or use money from internships or scholarships to cover their costs.
| Characteristics | Values |
|---|---|
| Responsibility of parents to pay for college | 77% of American families used parent income and savings to pay for some of their kid’s college expenses |
| Average parent contribution | $13,000 per year |
| Parents using savings and investments | 37% of families |
| Parents using retirement funds | 18% of families |
| Types of costs covered by parents | Tuition and fees, living expenses like room and board, books, computers, or school supplies |
| Tax-advantaged savings account | 529 plan |
| Tax credits | Lifetime Learning Tax Credit, American Opportunity Tax Credit |
| Student contribution | 39% of students pay for all of their college expenses |
| Student part-time work | Can help pay for room and board, books, or tuition |
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What You'll Learn
Students can claim tax credits for being enrolled in college
In the US, students can claim tax credits for being enrolled in college. The American Opportunity Tax Credit (AOTC) is a tax credit of up to $2,500 per year for students seeking a degree, certification, or other recognised credentials. To be eligible, students must be enrolled at least half-time and must not have completed the first four years of post-secondary education at the beginning of the tax year. Students must also not have claimed the AOTC for more than four tax years and must not have been convicted of a federal or state felony drug offence.
The Lifetime Learning Tax Credit is another option, offering up to $2,000 per year for students enrolled in any continuing education courses or programs, including PhD programs and career development courses. It's important to note that students cannot claim both the AOTC and the Lifetime Learning Tax Credit simultaneously. However, a household can claim both tax credits for different family members in the same year. For example, if a child is enrolled in college and a parent is taking continuing education courses, the parent can claim the Lifetime Learning Tax Credit, while the student claims the AOTC.
To claim the AOTC, students must complete Form 8863, Education Credits, and file it with their tax return. They may also need to provide a Form 1098-T, Tuition Statement, from their eligible educational institution. This form reports the amounts paid for qualified tuition and related expenses and is typically provided to both the student and the IRS by the institution. However, there are exceptions, and some students may not receive this form. In such cases, they can still claim the credit by providing evidence of enrolment and payment of qualified tuition and related expenses.
While the US government considers it the parents' responsibility to pay for college, the reality is more nuanced. According to a Sallie Mae study, during the 2021/2022 school year, the average parent contributed about 43% of their student's college costs using income and savings, with an additional 8% covered by loans. However, many students also contribute to their college expenses, with 39% paying for all their expenses and 29% paying for a portion. Ultimately, families must decide what works best for them and explore various funding sources, including scholarships, grants, and college savings plans.
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Parents can open a 529 savings plan to pay for college
While the government believes it is the parents' responsibility to pay for college, not all parents contribute to their child's education. According to a Sallie Mae study, 77% of American families used parent income and savings to pay for some of their children's college expenses, with the average total parent contribution being $13,000 per year.
One way for parents to save for their children's education is by opening a 529 savings plan. Named for a section of the Internal Revenue Code (IRC), 529 plans are tax-deferred savings plans designed to help pay for college expenses. They are sponsored and run by the 50 states and the District of Columbia, and their rules and fees differ from state to state. The scope of 529 plans has expanded in recent years, and they can now be used to cover the costs of K–12 education, apprenticeship programs, student loan repayment, and Roth IRA contributions.
There are two basic types of 529 plans: educational savings plans and prepaid tuition plans. Prepaid tuition plans allow account owners to lock in current tuition rates for future attendance at selected colleges and universities, while savings plans can be used at almost any eligible institution. Money saved in 529 plans can grow and be withdrawn tax-free as long as it is used for qualified education expenses. However, it's important to note that contributions to a 529 plan are not tax-deductible, and there may be gift tax consequences if contributions to a particular beneficiary exceed $14,000 in a year.
When opening a 529 plan, the account owner designates a beneficiary, who is typically the student. The beneficiary only needs a valid Social Security Number (SSN) or taxpayer ID number, and they do not need to be related to the account owner. The 529 plan should be in the parent's name and not the student's, as a 529 plan in the student's name could be counted against them when applying for financial aid.
In addition to 529 plans, parents can also use traditional savings accounts or investments in the stock market to help cover their child's college education. In some cases, parents may even withdraw from their retirement accounts, although this may come with penalties for early withdrawal.
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Students can work part-time to cover college costs
While the government believes parents are responsible for paying for college, many students opt to work part-time to cover their college costs. In fact, 39% of students pay for all of their college expenses, and 29% pay for some of them.
There are many part-time job options that can help students cover college costs. For example, many college students work part-time in the service industry because the hours are flexible, and tips in busy establishments can help pay for school. Students can also work as tutors, either locally or online, to earn money teaching younger students. Some companies, like Amazon, offer tuition assistance programs that reimburse a portion of the cost of books and other required materials for employees enrolled in a qualifying degree program. Other companies, like Taco Bell, offer employees the chance to win scholarships.
Students can also work as research or teaching assistants, which usually covers part of their tuition. These positions are typically for graduate students and are awarded through individual departments at a college or university.
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Parents can take out loans to pay for college
In the United States, the government believes that it is the parents' responsibility to pay for college. This is why they ask for parental financial information on the FAFSA form and any other supplemental forms. However, not all parents pay for their child's college education, and many students pay for all of their college expenses themselves.
If parents are unable or unwilling to help pay for their child's college education, there are several ways for students to take out loans without a parent borrower or cosigner. These include federal student loans, increasing federal student loan limits by qualifying as an independent student, getting a private student loan with someone other than a parent as a cosigner, and tuition instalment plans.
Tuition instalment plans are a good option for students working their way through college. Most US colleges and universities offer these plans, which can help curb the need for any student loan. Students can pay their tuition and fees in monthly instalments, avoiding the need for a huge upfront, lump-sum payment.
Students can also apply for federal student loans without their parents' involvement, as long as they remain under the maximum cap. They can do this by filling out the FAFSA form as an independent student, which means they won't be required to include information about their parents' income or assets.
In addition to loans, students can take advantage of scholarships, work-study opportunities, and part-time jobs to help pay for college.
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Students can apply for scholarships and grants
While the government believes parents are responsible for paying for college, and many parents do contribute to their child's college education, there are other options available. Students can take out loans, work part-time, or use money from internships to fund their studies. However, one of the best ways to fund college is through scholarships and grants.
Completing the FAFSA (Free Application for Federal Student Aid) is the first step to qualifying for financial aid. It is important to note that neglecting to complete the FAFSA means not qualifying for certain scholarships, grants, and other forms of financial aid. Over half of all students do not submit the form, which is a common mistake.
Federal grants may be awarded based on financial need as demonstrated on the FAFSA and do not need to be repaid. Additional federal grants may be awarded based on intent to teach in a school that serves low-income families, or if a student's parent or guardian was a member of the US Armed Forces and died as a result of service in Iraq or Afghanistan after September 11, 2001. Colleges may also provide institutional grants and scholarships to help families afford college.
Students can apply for as many private scholarships as they want, and these may be offered by local organisations or businesses for students studying in a particular region or field. There are also tax credits that can be claimed each year for being enrolled in college, such as the Lifetime Learning Tax Credit and the American Opportunity Tax Credit.
It is important to start the scholarship search early and to continue the search through college to maximise the opportunities to qualify for scholarships.
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Frequently asked questions
According to a Sallie Mae study, 77% of American families used parent income and savings to pay for some of their kid’s college expenses. 37% of families used parent savings and investments outside of college savings plans. On average, parents pay for less than half of their kid's college education.
Parental contributions can cover tuition and fees, as well as living expenses like room and board. If the child gets a scholarship that covers tuition, parents may contribute to other costs like books, computers, or school supplies.
Parents can open a 529 savings plan, which offers tax benefits and financial aid advantages. They can also put money into a high-yield savings account or a taxable brokerage account. It's recommended to start saving as early as possible.
Students can work part-time or full-time to cover college costs, although this may not be feasible for those who need to pay for their entire education. Students can also apply for scholarships, grants, and loans, or consider military student aid.
