Intimidated by college costs? Know your options

Consider alternative options, start saving, and be up front with your student.

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Skyrocketing college costs are forcing many Americans to re-examine college choices for their children and grandchildren. What do you do if you've exhausted every financial aid opportunity and you don't think you can afford the high cost of your loved one's dream school?

Let's look, first, at some of the ways to avoid the quarter-million-dollar—or higher—price tags of the most expensive institutions.

  • Communicate. No matter how you deal with college costs, talk over your strategy with your student. If you have a set amount of dollars you can contribute, make this clear.
  • Broaden your search. Some lesser-known schools match the most prestigious universities in reputation and caliber—at half the price. Many consumer publications list not only the top schools but also the most cost-efficient schools, so do your homework.
  • Consider in-state options. Many state colleges and universities have reputations that rival the best private institutions and boast tuitions for in-state residents that are much lower than for out-of-state students.
  • Pay in-state tuition for out-of-state study. Increasingly, state schools are expanding their definitions of residency—and in-state tuition. The Southern Regional Education Board's (SREB's) Academic Common Market is a representative pioneer of these multi-state arrangements. When students can't find a particular course of study in-state, SREB's Academic Common Market allows them to apply to schools offering their specialized field in more than a dozen southern states, at in-state tuition rates. Also check for locales like New York state, which currently offers free tuition at state, city, or community colleges for residents whose families earn less than $125,000 per year, and San Francisco, which foots the cost of tuition for those enrolled at community colleges.
  • Take a detour. For those looking at colleges in states that offer free tuition at community colleges, consider taking common, required core courses for free at these schools at a fraction of the price of four-year colleges, and then transferring those credits to a first-choice, four-year school after two years. One caveat: Some universities may not accept transfer credits, so ask ahead.

You might also ask about other ways students can gain credit before matriculating: advanced placement courses to gain college credits while in high school, for example, or CLEP (College-Level Examination Program) tests to receive credits for life experience.

Any amount saved will help

Even free tuition won't erase the bill you'll receive for room, board, and other expenses, so it's best to save specifically for the associated costs of college as well—and every extra little bit counts.

There are a few tax-advantaged approaches available to you:

529 college saving plans

When you contribute to a 529 plan, potential earnings are tax-deferred and eventually tax-free when used for qualified higher education expenses. The owner of the account controls distributions—helpful in the event Junior wants to travel the world for five years after high school graduation.

Another plus: A 529 account owned by a grandparent or parent need not be reported as an asset when figuring federal financial aid. However, distributions will be included in the student’s income when financial aid is calculated in future years, so the timing of distributions can be crucial. Some state 529 plans also offer residents additional tax breaks on contributions.

Coverdell education savings account (ESA)

Coverdell ESAs don't pack the punch of 529 plans—contributions are limited to $2,000 per beneficiary annually—and are also off limits to higher-income folks, but they do grow tax-deferred and are tax-free for qualified education expenses.

Give tax-free gifts

Another tax-advantaged way to contribute to a loved one's college fund? Gift cash outright. Any taxpayer can gift up to $14,000 per year, per beneficiary. You can tap your gifting limit up front with a 529 plan, contributing five years' worth of annual $14,000 gifts. That's $70,000 per donor, per beneficiary, without having to pay a gift tax or reducing the lifetime gift tax exclusion. (Other rules apply.)

Eyes wide open

Our middle daughter faced a difficult decision: Her home-state university named her a state scholar—a designation that included free tuition—but her first choice was a prestigious, private school, costing $60,000 annually at the time.

The more expensive school offered financial aid, which was mostly loans. We had saved a certain amount and could contribute a little more, but all of that barely put a dent in the $60,000-per-year price tag. Under different circumstances, this might have proven a rude awakening for our daughter. But because we were completely open about our resources and the tradeoffs we were—and, perhaps more importantly, were not—willing to make, she understood the reality of the situation: either she would take on enormous debt or go to an exceptional school for free. She chose the latter and is free of student loans today.

The moral of the story? These conversations matter. Openness matters. Setting expectations at achievable levels matters. And the sooner you bring honesty and transparency to your kitchen table discussions about college costs and options, the better.

Doing so can also be a useful reminder to parents to be careful about how much they borrow—especially when it comes to financing loved ones' educations at the expense of your retirement income. From 2005 to 2015, the number of people age 60 and older with student loans quadrupled from about 700,000 to 2.8 million. In 2015, this age group had $66.7 billion in outstanding student loan debt.* Remember: It's true you can borrow for college, but not for retirement.

There is a way...

Even as higher education costs increase, know that you have choices. Take your time, examine your choices, and make a family decision that's right for everyone.

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* Snapshot of Older Consumers and Student Loan Debt, Consumer Financial Protection Bureau, January 2017
The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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