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Savings 101: How to Plan for College Bills

Savings 101: How to Plan for College Bills

It’s no secret that college costs are spiraling upward. Over the last two decades, the average cost of a single year at a four-year public school—including in-state tuition, fees, and room and board—has jumped about 80%, according to a survey by the College Board.1 And the price of a year at a private school rose more than 30%.

That amount doesn’t even include costs like books, supplies, transportation and other expenses. Altogether, four years at an in-state public school now costs roughly $83,000, while the bill for a private education could run to twice that amount or more.2

These daunting figures are why so many people turn to special tax-advantaged accounts—like 529 plans—to help save for college. These state-sponsored programs allow parents, relatives and friends to contribute money to support a child’s (or any person’s) college education.3 The money is invested until it’s time to start paying school-related bills, and the investment income isn’t subject to federal income taxes (and possibly state taxes). That makes it easier to build savings.

But there’s a caveat: The tax benefits apply only if you spend the money on “eligible” expenses.4 In broad terms, you can think of these as the essentials—such as tuition and fees, textbooks, room and board, and even computers and Internet service—so long as they’re required by the school. The tax penalty for spending on ineligible items can be steep—you’ll have to pay income taxes and a 10% penalty on any of the investment gains you’ve spent. 

So although 529 plans remain a valuable—and popular—tool for saving for college, they also have their limitations. If you’re concerned about covering all of the costs of college, it’s worthwhile to consider some common expenses that aren’t covered by 529 plans, as well as some options for saving for them.

  • Living off campus? You can use money from a 529 plan to pay for off-campus rent and groceries—but only up to a point. Anything you spend above what it costs for a student to live and eat on campus won’t be considered an eligible expense by the IRS. You also must be at least a half-time student. To find out more, check with the school’s financial aid office and be sure to keep your receipts.
  • Planning to travel? You can’t use 529 funds to pay for the costs of traveling to and from college or a trip home for the holidays. Spring break trips are also out. So are any costs arising from commuting, public transportation and parking fees.      
  • Studying abroad? You can use 529 funds to pay for education-related expenses and room and board overseas—but the amounts will be based on the school’s budget calculations and won’t reflect currency differences. Weekend trips aren’t eligible. You can also use 529 funds to pay for tuition at an overseas university. As of the 2018 school year, about 400 overseas institutions were eligible, according to the office of Federal Student Aid. Check here to see if a particular school is on the list.
  • Medical expenses? You can’t use 529 funds to pay for medical bills.
  • Killing time and socializing? You can’t use 529 funds to pay for entertainment. That applies to on-campus movies, concerts and sporting events, as well as any costs related to participation in clubs, sports or groups like fraternities and sororities.
  • Furnishing a room? You can’t use 529 funds to pay for bedding, furniture, decorations, lamps, storage, TVs or microwaves for a student’s room. Nor can you use such funds to buy clothes.

This list doesn’t cover everything, but it offers a glimpse at some of the many costs that can pop up. To be clear, 529 plans can definitely help you cover the lion’s share of your college bills without risking any tax penalties.

But what about the rest? Schwab has a few options to help you save and invest for the future:

  • Individual investment account. A regular investment account can be an important savings tool. You can also use an investment account with a disciplined saving strategy called dollar-cost averaging, whereby you invest a fixed dollar amount on a regular basis. That can help you automate your contributions and build your savings over time.
  • Custodial account. With a custodial account, an adult can set up and manage an investment account on behalf of a minor. As soon as the child reaches age 18 (or, in certain states, 21), he or she can take full control of it. 
  • Note that if large amounts of money are involved, there can be tax issues as well as a possible impact on college financial aid that you’ll want to consider.

“Average Tuition and Fees and Room and Board in 2017 Dollars, 1987-88 to 2017-18, Selected Years,” College Board, 2017.

“Average Published Undergraduate Charges by Sector and by Carnegie Classification, 2017-18, College Board, 2018.

3 Recent changes to federal tax law permit up to $10,000 from a 529 plan to be used for K–12 tuition. State rules vary. Check with your plan and your tax advisor before you invest or withdraw money for non-college-related expenses.

4 “IRS Publication 970, Tax Benefits for Education,” 2018.

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Important Disclosures

Before opening and investing in a 529 plan, carefully consider the information contained in the 529’s official statement, including investment objectives, risks, charges, and expenses. You can request an official statement from the specific plan sponsor. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Dollar-cost averaging does not assure a profit and do not protect against loss in declining markets.

Please read the Schwab Intelligent Advisory™ disclosure brochures  for important information.

Schwab Intelligent Advisory™ is made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment adviser and broker-dealer. Portfolio management services for Schwab Intelligent Portfolios™ are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”), a registered investment adviser. Please refer to the disclosure brochures for details about Schwab Intelligent Advisory. Free credit balances are swept into deposit accounts at Charles Schwab Bank (“Schwab Bank”). Brokerage products and accounts are offered by Schwab, Member SIPC . Deposit and lending products are offered by Schwab Bank, Member FDIC and an Equal Housing Lender. Schwab, CSIA, and Schwab Bank are affiliates and are subsidiaries of The Charles Schwab Corporation.


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