College Planning: Key Financial Considerations

K. Brad Tedrick, CFA®, CFP®

Benjamin Franklin once said that “an investment in knowledge pays the best interest.” As many high school seniors prepare to make their final college decisions, families face one of the most significant financial commitments of their lives. The investment in higher education represents not only substantial costs but also a complex decision about future career prospects, quality of life, and financial independence. With proper planning and perspective, families can navigate these decisions strategically, balancing immediate costs against long-term benefits.

Higher education still offers significant economic benefits

When making education decisions, it’s important to distinguish between the cost of attending college and the value it provides. There is no doubt that tuition and other expenses have risen dramatically. However, there is strong evidence that higher education still offers significant lifetime benefits. Since these returns can vary greatly depending on the choice of school and college major, thought and financial planning are needed.

It’s well known that college costs have consistently outpaced inflation over the past 40 years. According to the College Board’s latest report, the average cost for the 2024-2025 academic year reached $58,600 annually for private four-year institutions and $24,920 for public universities for in-state students (both figures include room and board).

This rapid increase stems from multiple factors including reduced state funding for public universities, expanded campus amenities, increased administrative costs, and investments in technology infrastructure. The post-pandemic era has further accelerated these trends with investments in hybrid learning capabilities and enhanced campus health measures. In the current political climate, the cost of education also carries uncertainty related to government funding cuts.

Understanding these trends is essential for families at any stage of the college planning process, whether preparing for immediate enrollment or developing a long-term educational strategy. In general, starting earlier allows for more strategic saving and potentially reduces the need for student loans that can burden graduates for decades after completing their education.

One concern some students have is whether college is still worth the cost. While it can vary significantly, data consistently shows that higher education continues to provide significant economic advantages.

According to recently released data from the Bureau of Labor Statistics, the unemployment rate for those with a bachelor’s degree was just 2.5% in 2024, compared to 4.2% for those with only a high school diploma. Similarly, average annual earnings for college graduates reached $77,150, substantially higher than the $46,500 for high school graduates. For those with master’s, professional, and doctoral degrees, the unemployment rate falls further and annual earnings are higher. These earnings differences compound over a lifetime as college graduates earn more throughout their careers.

Different majors can lead to significantly different outcomes

While these numbers are compelling, they don’t tell the complete story since outcomes can vary significantly based on field of study, institution attended, and how effectively students leverage their education into career opportunities.

When evaluating the financial return on education, the choice of major plays a crucial role. The accompanying chart shows median annual earnings for professionals between the ages of 25 and 64 with bachelor’s degrees. STEM fields (Science, Technology, Engineering, and Mathematics) consistently demonstrate the strongest returns, with some fields showing median annual earnings exceeding $100,000. Engineering and computer science majors lead in earnings potential, while healthcare and business fields also show strong returns.

By contrast, fields in the humanities and education typically offer lower median earnings. Of course, there are many benefits to higher education beyond monetary earnings, and there are many paths that graduates can take with these degrees. So, these numbers don’t diminish the importance of these fields but instead highlight the need for careful financial planning when pursuing these paths.

Alternative educational paths deserve consideration as well. Technical certifications, associate degrees, and apprenticeship programs can offer focused skill development at lower costs, sometimes with employment outcomes comparable to or exceeding some four-year degrees. These options may represent pragmatic alternatives for certain students or complement traditional degree programs.

Education vehicles and strategies offer planning flexibility

Ideally, creating a plan to pay for college occurs long before you know what kind of education your child, grandchild, or other family member will be interested in. But even for those near college acceptance, taking advantage of the right vehicles and strategies can help.

529 plans remain the foundation of most education funding strategies, offering tax-free growth and distributions for qualified education expenses. Recent legislative changes have enhanced their flexibility, allowing limited rollovers to retirement accounts and provisions for apprenticeship programs and student loan repayments. Many states also offer tax deductions or credits for contributions, enhancing their appeal.

UGMA/UTMA accounts, which stand for “Uniform Gifts/Transfers to Minors Act,” provide alternatives that allow for greater flexibility in how funds can eventually be used. While lacking the tax advantages of 529 plans, these vehicles allow greater flexibility in asset use while removing substantial assets from taxable estates.

For families with the means to do so, direct tuition payments to educational institutions can offer a powerful exception to gift tax limitations. This is because payments made directly to educational institutions for tuition expenses are exempt from gift taxes, regardless of the amount. This special provision in the tax code allows grandparents or other family members to contribute significantly to a loved one’s education without using any portion of their lifetime gift and estate tax exemption or annual gift tax exclusion.

Other approaches, such as customized trust structures, can help as well. For instance, education trusts give donors more control over how money is used for college costs. You can set up rules about grades, choice of schools, or even extend benefits to future generations.

These trusts can also help reduce taxes while supporting your family’s education values.

It’s important to connect any college savings plan with your overall financial plan. Tax rules for education savings change over time, so staying up-to-date is critical. Working with a financial advisor can help you make the best choices for your family’s education goals in the current environment.

The bottom line? College planning requires balancing immediate costs against long-term benefits. By starting early and considering the most appropriate vehicles and strategies, families can make choices that support future educational and financial success.