The changing attitudes about college have had a significant impact on college enrollment. From 2010 to 2021 (the most recent available data), enrollment has declined 15% across the board. That may sound like a modest decrease, but equates to 2.7 million fewer college students now than there were a decade ago.

I enrolled in college in 2011, right at the peak of college enrollment in the US. I felt that college was a requirement to getting a good-paying job and most of my classmates felt the same. I believe high school graduates today feel like they have more options after graduation than I did, which is a great thing. There are good-paying jobs available that don’t require a college degree and, maybe more so than in the past, those jobs are not looked down on. 70% of white-collar workers say that blue-collar jobs are more respected now than they were 10 years ago, and over 90% of blue-collar workers are proud of the work they do.

There are many paths to financial success that don’t involve a college degree, but I believe the pendulum has swung too far in the opposite direction. Not only is college still worth it for many students, the data shows that, while attitudes about college have shifted over the last decade, college is now a better value.

Why college is a bargain (on average)

The shifting attitudes about college are understandable. For decades, tuition costs have been rising much faster than inflation. As costs have risen, so has student loan debt. When you think “recent college graduate,” what image comes to your mind? Is it a successful white-collar professional or a struggling Starbucks barista? For many Americans, the latter image has firmly taken over and “recent college graduate” has become synonymous with “struggling young adult.” 

Why is this? I blame the decline of thoughtful journalism and the increased prevalence of clickbait, sensational headlines. You simply aren’t going to see many headlines that read: “Most College Graduates Doing Good, Data Shows,” or “Lauren, 22, Graduates with Little Debt and Receives Great Job Offer.” Instead, you often see headlines such as “Woman’s Dream of Being a Nurse Leaves Her $110,000 in Debt” or “Why Today’s Graduates Are Screwed.

If you look beyond the clickbait headlines, college actually looks like a bargain. Over the last few years, inflation-adjusted tuition costs have fallen. It is now cheaper, in real dollars, to attend college in 2025 than it was when I enrolled in 2011. If you think that college costs are moderating because earning potential is decreasing for college grads, well, you’d be wrong. College graduates have historically made significantly more than those without a degree. Instead of shrinking, that gap is widening.

For young workers aged 22 to 27, the average high school graduate without a college degree makes $36,000 per year, compared to $60,000 for the average college graduate. The unemployment rate is twice as high for those without a college degree. Self-reported financial wellbeing for college graduates is 87%, compared to 67% for those without a degree. Median lifetime earnings for college graduates are $1.2 million higher than non-graduates. All of the data shows that, on average, attending college is a great decision.

College offers economic mobility

I wasn’t poor growing up, but I didn’t have many advantages that wealthier kids often have. I attended (and graduated from) a Title I high school. I could only afford to take the SAT and ACT one time each, and I didn’t have any tutoring or material to study to prepare. The exams also weren’t offered in my county, so I had to wake up at the crack of dawn and drive 45 minutes to an unfamiliar high school to take them. My 1996 Buick Century that got me there was the worst looking car in the parking lot. I often felt embarrassed to drive it.

Growing up, my mom took us to the public library at least twice a week. I loved learning and I was always a good test taker in school. I had advantages over many of my friends. Neither of my parents were on drugs and both were present. We always had food to eat and never went hungry. I didn’t have to worry about providing for my household at a young age. My parents made it clear that doing good in school was the most important thing for me growing up.

Those advantages in life helped me do very well on the ACT, which got me into a great college, which led me to where I am today. Although I didn’t realize it until I was older, my parents knew that a college education could allow me to move up the economic ladder. High school students today considering college actually have greater potential for economic mobility than I did, not less. In fact, an analysis of the outcomes of over 30 million students found that public universities offer the greatest economic mobility. For most kids, college is your best chance at climbing the ladder.

It is worth repeating that college is by no means the only way to achieve financial success, however you measure it. Some of the wealthiest individuals in the country never graduated college. It isn’t a golden ticket and you must be very careful deciding which college to attend, choosing a major, and paying for school (check out this article for some tips on how to do college the right way, and read up on the best (and worst) college degrees here). However, my story, and the millions of stories just like mine, are proof that public education and public universities are a great path to becoming financially secure.

Is college worth it?

Ignoring all of the potential non-financial benefits of going to college, what does it take for college to be a smart financial decision? This is far from an easy question to answer, but we can at least do a financial spot check with a simple math equation that accounts for the opportunity cost of the dollars you would spend on education.  The estimated opportunity cost of a typical degree comes in at a whopping $10 million if you were to instead invest the average annual college cost from ages 18 to 21 until you retire at 65.

$10 million is a LOT of money by retirement, but it isn’t crazy to think you could make up that difference with a college degree. If you went to college and were able to earn an extra $14,640 per year compared to someone not attending college, and invested that amount each year, you would end up with the same $10,452,794 by age 65. College graduates earn an extra $32,112 per year on average, although they are also more likely to live in high cost of living areas and may not be able to invest the full difference in earnings each year, even if they wanted to.

This is a very simplified example. Some students will be paying much less for college and some will be paying much more. Your experience at college has value too, and your expected career earnings are not the only benefit of attending college. College graduates are 72% more likely to have a retirement plan at work, 2.2x less likely to lose their job, 44% more likely to report their health as good or excellent, participate more in their community, are happier, and live for seven years longer than those who have never gone to college. I think it’s obvious that not all of this is causation and some is correlation, but it’s clear that college does have non-financial benefits.

Your future career aspirations are significantly more important than whether or not you attend college. There are plenty of high-paying jobs available to those who do not attend college, and plenty of college degrees have low starting wages. The bottom line is that you can be successful, in life and financially, whether or not you attend college.

If you are exploring what paths are available to you without attending college, check out our list of the top-paying jobs without a degree. Since the decision to attend college can be costlier and riskier, I’ll focus on the best and top-paying college degrees in this article.

Best college degrees in 2024

The Federal Reserve compiles data on outcomes by major, which looks not only at early career wages but mid-career wages, unemployment rate, and underemployment rate. This list will consider all of these factors.

1. Engineering

Looking at the numbers, it’s hard not to consider engineering the best college major out there. The top five highest-earning jobs for mid-career workers are all engineering: chemical engineering, computer engineering, aerospace engineering, electrical engineering, and mechanical engineering (in order from highest salary mid-career, $120,000, to mechanical engineering, with $105,000). If you look at early career wages, engineering majors still hold four of the top five spots. Unemployment rates are low, coming in around 3% to 6%.

2. Computer Science

It’s no surprise that computer science is one of the best college majors out there. Early career graduates earn about $73,000, with those further along in their career making $105,000. The unemployment rate among computer science is 4.8%, so they don’t have much trouble finding a job.

3. Pharmacy

Pharmacy graduates don’t make as much money starting out in their career as some other majors, at $55,000, but earn six figures when they reach the midpoint of their career. Job prospects are good for pharmacy majors too, with an average unemployment rate of 4.8%.

4. Finance

Hey it’s us! Jobs in finance are very well-paying, with a median early career salary of $60,000 and mid-career wages of $100,000. They have an easy time finding jobs as well, with an unemployment rate of just 4.1%.

5. Nursing

Nursing isn’t as lucrative as some other fields, with early career wages of $55,000 and mid-career of $75,000, but they are in HIGH demand. Only 1.3% of those with a nursing degree are unemployed. If you are concerned about your job prospects after graduation, nursing could be a great field to investigate.

Worst college majors in 2024

The “worst” college majors aren’t always worth avoiding, but it’s important to be aware of the downsides before you go into debt to get a degree that may not have the return on investment you were expecting. It is interesting and ironic that some of the worst majors also have higher advanced degrees as a percentage. Making you wonder if employment is the objective or nudging struggling graduates into more advanced degrees and potentially even more student loan debt.

1. Fine Arts

Those with fine arts degrees unfortunately have a high unemployment rate, at 12.1%, and median early career wages of $40,000. The share of those with a graduate degree is 23.2%, which means many attend college for longer than four years and may be more likely to take on student loan debt.

2. Family and Consumer Sciences

The unemployment rate for family and consumer sciences graduates is also higher, at 8.9%, and early career wages are $37,000. 32.9% of FACS graduates have graduate degrees, which again means more time spent in school and potentially more money spent on school.

3. Social Services

Those in social services don’t have a hard time finding a job, with an unemployment rate of 3%, but early career wages are $37,000 and mid-career wages are $52,000. The majority, 52.4%, also hold a graduate degree.

4. Early Childhood Education

Early childhood education majors have jobs, with 3.1% unemployed, but salaries start lower and don’t have much room for growth. The early career salary is $40,000 and mid-career salaries are just $43,000.

5. Philosophy

On average, philosophy majors have a more difficult time finding a job, with a 9.1% unemployment rate. Early career salaries start at $42,000 and reach $68,000 by mid-career. However, a whopping 56.5% of philosophy majors have graduate degrees.

What are good majors that will be in-demand in the future?

Your college major won’t determine just what you are doing for the next few years, it can determine your career path for the next 40 years. With that in mind, it’s important to pick a future-proof major that will continue to be in high demand later in your career. The Bureau of Labor Statistics projects the growth rate of different career fields over the next 10 years, and predicts careers in software development and computer science to continue to grow very quickly. With our aging population, other fields expect to see a surge in growth, including actuaries, nurse practitioners, home health aides, and physical therapist assistants.

Choosing whether or not to attend college, and which college and degree program to choose, is a decision that should not be taken lightly. You can be happy and successful without attending college, but if your path leads you there, you must do it right. Choosing one of the best majors can help you ensure you have a job after graduation and earn a higher salary than your peers. The biggest takeaway is to be purposeful in your higher education decision. Around 70% of college graduates work in fields outside of their college major. As with most big decisions in life, make sure you begin with the end in mind and measure twice and cut once to ensure you are happy with the outcome and set yourself up for success.

The average cost of attending college for one year is $26,027. If someone instead invested that amount each year from ages 18 to 21, for a total of $104,108, they would have $10,452,794 invested by age 65 (assuming a 10% annual rate of return).

The opportunity cost of spending the average annual cost of college attending rather than investing could be over $10 million by retirement. It’s a number that sounds almost incomprehensible and impossible to overcome – but starting at such a young age makes it more attainable than you would think.

To reverse engineer the math we just did, let’s assume someone graduates college at 22 and wants to invest an amount per month to catch up to the person who did not attend college. To reach $10,452,794 by 65, the college attendee would need to invest $1,220 per month every month from age 22 to 65. In other words, their college degree would need to earn them an extra $14,640 per year for it to be “worth it.”

That’s certainly not a small number, but it’s much smaller than $10 million. It’s very possible for a college graduate to earn $14,640 per year more than someone who didn’t attend college, and many DO, which makes college worth it in many situations. Ultimately, college being a smart decision often hinges on choosing your major wisely. Check out the list of the top 5 highest-paying college degrees below.

1. Petroleum Engineering
2. Industrial Engineering
3. Computer Science
4. Interaction Design
5. Public Accounting

The average cost of college may not be representative of what college will cost for you. If you attend private college, the opportunity cost of going to college could be well over $20 million by retirement. There are many ways to lower the cost of college.

How to Do College Right

• Apply for scholarships.
• Work for a company that offers tuition reimbursement.
• Take core classes at more affordable alternatives (like community college).
• Apply for all financial aid you can.
• Keep student loan debt below your expected first year salary.

Some colleges offer scholarships to students when they are accepted, and some take a little more work to apply for. While not every student will receive scholarships, every student should at least see which scholarships they may be eligible for and apply for all they can. I worked for a company that offered tuition reimbursement as an employee perk while I was in college. There may be certain requirements; in my program, you had to be taking classes for a certain major and maintain good grades, but it can be a huge opportunity for college students to get extra money to pay for school.

I enrolled at a major university right out of college and didn’t even consider taking core classes at a community or technical college, but I wish I had. Classes can be a fraction of the cost and they count the same as courses taken at a more expensive university. Outside of scholarships, FAFSA, and tuition reimbursement, there may be even more opportunities for financial aid. Grants, apprenticeships, work-study programs, and other aid may be available.

If you do need to take out student loans to help pay for college, keep your total student loan debt below your expected first year salary. Following this rule will not only keep your student loan debt manageable, but will ensure you do your research about your major and know your earning potential.

Not everyone needs to attend college! There are plenty of good-paying jobs that don’t require a four-year college degree. These jobs still require highly-skilled, trained employees, but can be a less costly path for those that don’t believe college is for them. The list below shows the top 10 highest-paying jobs that do not require a college degree.

Top-Paying Jobs Without a Degree

1. Air Traffic Controller ($122,990)
2. Nuclear Power Reactor Operator ($100,530)
3. Transportation/Storage Manager ($92,460)
4. Police Supervisor ($87,910)
5. Commercial Pilot ($86,080)
6. Power Plant Dispatcher ($85,950)
7. Radiation Therapist ($85,560)
8. Elevator Installer and Repairer ($84,990)
9. Detective/Criminal Investigator ($83,170)
10. Power Plant Operator ($81,990)

When I was in high school, I remember getting the impression that anyone who didn’t go to college was considered a failure and would never have the chance to earn much money. The jobs most commonly associated with not going to college were what we traditionally think of as “dead-end” jobs, such as in fast food, customer service, or other similar industries.

Fortunately, I think attitudes about college are slowly changing. The rising costs have certainly been a catalyst for change. Just 35% of Americans 25 and older have a four-year college degree or higher, and 3 out of 10 billionaires do not have a college degree. College can be a great tool to increase your earning potential, and makes sense for many, but there’s no shortage of extremely smart and talented individuals that are successful without ever attending college.

Ultimately, the path you choose is up to you – becoming successful and wealthy can be possible if you go to college and take out student loans. It can be possible if you never attend college. Understanding the value of your time and return on your investment can help you build wealth no matter how your journey begins.

Beyond the ability to boast about the job prospects of their graduates, colleges don’t necessarily have a financial interest in ensuring graduates become successful after leaving school. No matter whether you choose a major with a poor success rate after graduation or a very high success rate, the college will make the same in tuition and fees.

Graduates of degree programs looking for jobs are able to offer a more unbiased perspective into the actual value of their major. Any rose-tinted glasses have likely worn off by the time graduates are deep into their job search after earning their degree. Which degrees do they end up regretting the most?

Worst College Degrees

A survey of recent graduates seeking a job asked them how many would pick a different major if they could, and the following chart shows the most regretted college majors.

As someone with a degree in one of, sorry, the most-regretted college majors, I feel like my decision to stay in school to complete a financial planning degree (spoiler alert, finance made the list of best college degrees) was absolutely the right decision. Still, I wonder if my college experience would have differed if I knew this statistic before deciding on a major. I chose the field of journalism because I had a strong interest in writing and wanted to develop my skills and eventually make a living writing. I was generally aware of the competitiveness of jobs and lower starting salaries, but it didn’t become a reality for me until I was close to graduating.

The focus in many degree programs, or mine at least, was making students the best possible _______ they can be, whether that blank is doctor, lawyer, journalist, artist, philosopher, or engineer. College is a place where you should be able to explore your interests and find a career path that makes you happy, but an emphasis should also be placed on choosing a degree program that is in demand and pays well (and “pays well” may be defined differently from person-to-person; you need to consider not only starting pay, but long-term career trajectory and the potential for growth). Unfortunately, the high percentage of graduates saying they would choose a different major if they could do it all over again indicates they are not happy with their career opportunities and/or salary potential.

Best College Degrees

The best college degrees, based on the percentage of job seekers that said they would choose the same program again, isn’t too surprising.

Degrees in computer science, engineering, nursing, and finance are among the highest-paying, so it makes sense that graduates with degrees in those fields of study would do it all over again if they had the option.

The reality of what a degree choice really means may not hit students until after graduation, when they begin to rely on their choice of degree to support themselves. It’s easy to overlook a bad decision when your choice of major doesn’t yet have any noticeable financial impacts on your life. If you have yet to choose a major, or decide if you are even going to attend college, make sure you weigh the earning potential and career satisfaction of any potential degrees.

If you graduated with a degree you now regret, making a career change is always possible and doesn’t have to be extremely costly. The table below shows some of the highest-paying jobs that require no college degree; all but two require just a high school diploma (air traffic controllers and radiation therapists must obtain an associate’s degree).

Trade schools or community college costs a fraction of the price of traditional college, and can be an option for both high school graduates or those further into their careers that are looking for a change.

Choosing a degree program can be overwhelming, but knowing what the earning potential and career satisfaction is of potential choices can help you narrow down your options. Begin with the end in mind: before you are even close to choosing a major, have an idea of what’s important to you when it comes to your future career. Even if you’ve graduated with a major you regret, it is never too late to change careers.

Tax-free 529 to Roth rollovers

This is the change that caught the most attention because it sounds new and exciting, and it could be for parents worried about oversaving in their child’s 529 plan. However, for everyone else, this change is heavily restricted and has several big-time obstacles that will keep this opportunity limited. Rollovers count towards your Roth IRA contribution limit, and the beneficiary must have earned income, so there’s no opportunity to build extra Roth IRA assets other than what you’d be able to build through normal contributions or using the backdoor Roth conversion strategy.

The lifetime transfer limit to an individual’s Roth IRA is $35,000, and the 529 plan must be open for at least 15 years to be eligible for this special rollover. Funds can only be rolled into the 529 plan beneficiary’s Roth IRA, and it isn’t clear yet if changing the beneficiary on the 529 plan will reset the 15 year clock. Contributions (and growth on contributions) made in the last five years will not be eligible for rollover. There is no income limit to roll funds from a 529 to Roth IRA, as long as you meet all the other qualifications.

For parents concerned about overfunding a 529 plan and being penalized for withdrawing contributions not used for education, this change should offer some peace of mind knowing that some or much of that excess may be able to go to your child’s Roth IRA. It isn’t some secret strategy that everyone can use to build more Roth IRA assets, and funding a 529 plan still falls into Step 8 of the Financial Order of Operations. You can start rolling assets from a 529 plan to a Roth IRA as early as 2024.

Changes to required minimum distributions (RMDs)

The biggest change to RMDs is the age you must start taking forced distributions increasing for many Americans. You can use the table below to determine your RMD age based on the current legislation.

It’s worth noting that RMD ages could change again, especially if you are further away from retirement. RMD ages increasing is great for anyone who has a significant amount of money in pre-tax accounts and the additional time maximizes long-term growth and planning opportunities. This change provides more time to convert pre-tax money to Roth going into retirement and could help keep Medicare premiums lower by keeping income down in those years that previously you would have been forced to take retirement distributions.

For those that forget to take RMDs or don’t take enough, your penalty is now reduced to 25% of the amount you didn’t take, and may be as low as 10% in some cases. It’s obviously better to take all of your RMDs and pay no penalties, but nobody’s perfect, and mistakes do happen.

In a welcome change for employer-sponsored plans, RMDs will be eliminated for employer Roth accounts including 457 plans, 401(k)s, 403(b)s, and TSPs starting in 2024. Pre-tax balances of employer plans will still be subject to RMDs. Before this change, many savers entering retirement would roll any employer-sponsored Roth dollars into Roth IRAs to avoid RMDs. This eliminates the need to roll Roth assets over to avoid RMDs, and means keeping employer-sponsored assets in your plan indefinitely becomes more viable.

Changes to catch-up contributions

The changes being implemented to catch-up contributions are a mixed bag, some great and some not so great, at least for high-income earners. To start with the good changes, IRA catch-up contributions (that you can begin in the year you turn 50) will be indexed to inflation next year instead of just a flat $1,000.

Catch-up contributions in employer-sponsored plans will be going up significantly in 2025, but only for those ages 60 to 63. Between those ages, you’ll be able to contribute the greater of $10,000 or 50% more than the standard catch-up contribution to your employer-sponsored plan. Here’s an example of how it would work, if limits were the same in 2025.

• Sandra, turning 50 in 2025, gets to contribute $22,500 to her 401(k) as elective salary deferrals and an additional $7,500 in catch-up contributions for a total of $30,000.
• Gertrude, turning 60 in 2025, gets to contribute the same $22,500; her catch up contribution is 50% greater than $7,500 or $10,000. It will be $11,250 (50% greater than the normal catch-up contribution). She can contribute a total of $33,750 to her 401(k).

They could have edited the bill and just changed it to 50% greater than the catch-up since it is highly unlikely that amount will ever be below $10,000. This part of the legislation was almost certainly written before we knew the catch-up was going up to $7,500 starting in 2023, so they probably put it in there just to cover their bases.

In not-so-great changes, at least for high-income earners ($145,000+ indexed to inflation), employer plan catch-up contributions must be Roth starting in 2024. There are some unique caveats to this rule, though, and it looks like those with over $145,000 in self-employment income instead of wages will still be able to choose to do a pre-tax catch-up contribution. There’s more gray area around switching employers; it appears that as long as you earn less than $145,000 in wages from your current employer in the previous year you can do pre-tax catch-up contributions. This means it might be possible to switch employers and earn over $145,000 total, but still do pre-tax catch-ups as long as you earned less than $145,000 from your current employer in the previous year.

To make matters more complicated, employers that don’t offer Roth options in their plans may not be able to offer catch-up contributions to any employees, if they have covered employees earning over $145,000. Here’s how that could look:

• Company X has a 401(k) plan with 50 eligible employees; 40 make under $145,000 and 10 make over $145,000. If they do not offer Roth contributions, none of their employees can make catch-up contributions. If they offer Roth and pre-tax options, those under the limit can choose either option for their catch-up contribution, but those over must do Roth.
• Company Y has a 401(k) plan with 50 eligible employees, all making under $145,000. All employees can make catch-up contributions regardless of whether or not Company Y offers a Roth option, and may choose to make pre-tax or Roth catch-up contributions.

Hopefully this won’t be much of an issue as more and more employers are offering Roth options in their plans. However, if you are one of the unlucky ones age 50+ in a plan without a Roth option, it could be worth keeping an eye on. It’s possible that you may not be able to make catch-up contributions at all starting in 2024. If you are in a plan without a Roth option, now is the time to advocate for a change. It’s usually very easy for an employer to offer Roth contributions in their plan, and if it isn’t easy, they can look for a new plan provider that makes it easy.

Changes to employer plans

Currently, employers can choose to automatically enroll employees in retirement plans when they become eligible for participation, unless the employee opts out. Starting in 2025, employers MUST automatically enroll plan participants when they become eligible (but participants can still choose to opt-out). Salary deferral upon automatic enrollment must start between 3% to 10% and increase 1% per year, to 10% to 15%. Again, employees can still opt-out of automatic enrollment, but employers must enroll employees who do not opt-out.

In a change intended to help employees prioritizing paying off student loans over getting their employer match, employers can now “match” an employee’s student loan payments by making contributions to their 401(k), starting in 2024.

Employer retirement plan contributions can also be Roth, if the employer offers the option to choose. If an employee elects to receive Roth employer contributions, they will pay the tax and contributions will be vested immediately.

Roth contributions will be allowed in SEP and SIMPLE IRAs starting this year, and SIMPLE IRA and SIMPLE 401(k) contribution limits will be going up by 10%, including catch-up contributions, starting in 2024.

Other changes

In great news for anyone with a disability now or that may become disabled in the future, anyone who becomes disabled before age 46 will be able to utilize an ABLE account starting in 2026. The current age is 26.

In great news for the insurance industry, but not-so-great news for many other folks, it is now easier to put annuities in retirement plans. An actuarial test that keeps more complex annuities out of retirement plans has been eliminated. This could be a positive for some retirees since interest rates are higher now, but we worry that some savers may end up with products in their retirement plans that are less than optimal.

QCD limits will be indexed to inflation starting this year, instead of just a flat $100,000. Unlike the RMD age, the QCD age has not gone up and is still 70.5.

Several FinTech start-ups offer paid services to help you find “lost money” in retirement accounts that have been lost or forgotten. They may no longer be needed next year, as the government is creating their own national database where you can search for any retirement accounts you may have forgotten about or left behind.

One of the more administratively complex changes is the end of the saver’s credit and beginning of the saver’s match, which doesn’t begin until 2027. Under the plan, those that qualify for the saver’s tax credit (phases out between income of $20,500 – $35,500 single and $41,000 – $71,000 married) will receive it as a government match in their retirement account instead of a tax credit. This government match must be repaid if it is withdrawn before retirement.

There are many other minor changes I wasn’t able to get to, so I encourage you to check out a summary of all changes in SECURE 2.0 if you are curious about a change I didn’t cover. We also broke down the legislation and answered questions in a recent Q&A episode. While nothing in the SECURE Act 2.0 is groundbreaking or will make or break your retirement, it is important to be aware of changes that could affect you and any planning opportunities that may be available.

What is FAFSA?

Students seeking aid for college, including federal grants, loans, and work-study, are required to fill out FAFSA annually to determine eligibility. In addition to determining eligibility for federal aid, many states and colleges use FAFSA information to determine eligibility for state and school aid, and some private lenders may use FAFSA to determine eligibility for loans. Almost everyone who attends college needs to fill out a FAFSA.

When can I submit FAFSA?

The application becomes available on October 1st of every year for students attending college the following calendar year. For students attending the 2022-23 academic year, they are eligible to fill out FAFSA as early as October 1, 2021. The federal deadline for submitting the application, for students attending 2022-23, is June 30, 2023. Deadlines for states and colleges vary.

The generous timeframe doesn’t mean you should wait until the last minute to file. The earlier you file, the more grant money you or your student are likely to receive (so do it now!). It is best to file as early as possible every year, so if you have a student in college, go ahead and mark your calendar for October 1st every year.

What do I need to submit FAFSA?

Speaking from experience, the most important thing students need to complete their application are their parents. The following information must be provided, from both students and parents (independent students may file with only their own information):

• Your Social Security number (or alien registration number if not a citizen)
• Federal income tax returns and W-2s (if you have an IRS online login, you may use their data retrieval tool to transfer data automatically)
• Bank statements and records of investments
• Records of untaxed income
• An FSA ID to electronically sign the application

What are the different types of need-based financial aid?

Need-based financial aid includes the following:

• Federal Pell Grants
• Direct Subsidized Loans
• Federal Perkins Loans
• Federal Work-Study
• Federal Supplemental Educational Opportunity Grant (FSEOG)

How is aid calculated?

The formula for determining the amount of need-based financial aid a student is eligible for is Cost of Attendance (COA) ? Expected Family Contribution (EFC) = Financial Need. The cost of attendance is provided by the college you or your child will attend, and the expected family contribution (EFC) is the mysterious variable that not many families understand completely.

What is EFC (expected family contribution) and how is it calculated?

The EFC determines how much need-based financial aid you or your child will receive, or if you will receive any at all. For dependent students, the expected family contribution is how much the students and parent(s) are expected to be able to contribute towards college costs. The Department of Education releases a detailed breakdown of the EFC formula every year (it can change slightly from year-to-year, but usually doesn’t change much). The formula to determine the parents’ contribution (the parental half of the EFC number) is Adjusted Available Income (AAI) ÷ Number of Children in College = Parents’ Contribution. 

The simple formula for determining the student’s contribution is Available Income + Contribution from Assets = Student’s Contribution. To get the EFC, you simply add up the parents’ contribution and student’s contribution. Like an onion or an ogre, the FAFSA formula has many different layers, and right now we’ve only scratched the surface. The next layer down is available income.

How is available income determined?

Parents’ total income includes taxable income, untaxed income, and benefits. If the parents’ taxable income is less than $27,000 (2021), and they meet one of three conditions (filed taxes, eligible to file taxes, or not required to file taxes), the EFC is automatically $0. Allowances against parents’ income include federal income tax paid, state and other taxes, Social Security tax allowance, income protection allowance, and employment expense allowance. Total Income – Total Allowances = Available Income. To get adjusted available income (AAI), just add the parents’ contributions from assets to their available income.

The student’s total income includes taxable income, untaxed income, and benefits. The student allowances include federal income tax paid, state and other taxes, Social Security tax allowance, income protection allowance, and an allowance for parents’ negative AGI. Total Income – Total Allowances = Available Income.

What assets are included in the “contribution from assets” number?

The big question that everyone wants to know: what assets are included in calculating the parents’ contribution from assets? Assets included are:

• Cash, checking, and savings accounts
• Net worth of investments*
• Adjusted net worth of business/farm

*Investments include but are not limited to real estate (excluding primary residence), trust funds, mutual funds, CDs, stocks, bonds, and commodities. 529 plans and Coverdell savings accounts are included in investments. Life insurance, pension funds, annuities, and non-education IRAs do not count as investments.

The formula for determining parents’ contribution from assets is Discretionary Net Worth × 0.12 = Contribution from Assets, where Discretionary Net Worth = Included Assets – Education Savings and Asset Protection Allowance.

The student’s contribution from assets is determined using the same formula, with a few minor differences:

• The student can not take an education savings and asset protection allowance, and
• The asset conversion multiplier is 0.20 instead of 0.12.

The following illustration shows how FAFSA and the EFC is calculated. If you’re a visual learner, this illustration will be much easier to understand than the paragraphs above.

Other factors that affect need-based financial aid

Enrollment status, maintaining satisfactory academic progress, and year in school also affect need-based financial aid. Students must be enrolled or accepted into an eligible degree or certificate program, and for direct loans students must be enrolled at least half-time. Other conditions may apply in different states or at different colleges.

Knowing exactly how FAFSA is calculated, what documents you need, and when deadlines are should make applying to college and for financial aid that much less stressful and scary. Remember, apply as early as possible every year to get the best chance at receiving more aid. For more information about how to best save for college, check out this article: “The Best Ways To Save for Kids” and this episode of the show: “The Best Ways to Save and Pay For College.”

Dollars are more powerful the younger you are, and many parents want to take advantage of this by giving their kids a head start on saving for the future. If you invest just $1,544 for your newborn, they could be a millionaire at age 65 without saving another dollar, based on an annual rate of return of 10%. It may be tempting to prioritize saving for your children as early as possible to set them up for a great future, but how do you know when it is okay to start saving for the kids?

Where does saving for children fall in the FOO?

There is no such thing as a retirement loan, so it’s important to make sure your own financial future is secure before worrying about your children. Saving for your children’s future education or retirement expenses falls in Step 8 of the Financial Order of Operations (shown below). This means before you start saving for your children, you should have your deductibles covered, be getting your employer match, have no high-interest debt, maintain a full 3-6 month (or more) emergency fund, max out your Roth IRA and HSA, max out any other retirement plans, and hyper-accumulate in a taxable account.

It may be difficult to wait until your own financial life is in order to save for your children, as it is hard to ignore how powerful dollars saved for your kids can be. However, your kids have their entire lives ahead of them; for college, they can work through school, earn scholarships, receive financial aid, or take out student loans. They have decades and decades left to get motivated and save for retirement. Parents do not have the luxury of putting off saving for retirement, and it is important to put your own retirement first.

Even if you did nobly sacrifice your own retirement to pay for your child’s education, your children may end up footing the bill eventually anyway by supporting you financially in retirement. Millions of parents live with their adult children, often not out of choice but to cut expenses, and 17% of children will become caretakers for parent(s) at some point. Saving for your own needs before those of your children is best for all parties involved.

About half of all American parents have already started saving for their children in some capacity. Even if they are all at the stage where saving for their children makes financial sense, they are not saving in the most appropriate vehicles. The chart below shows which savings vehicles, if any, parents are using to save for their children. 32% of parents are saving for their children in a regular savings account, compared to only 13% using a 529 plan, 7% using an IRA/Roth IRA, and just 3% saving in a custodial brokerage account. 8% of parents use savings bonds and CDs, which makes them more popular than Roth IRAs and custodial brokerage accounts.

The best savings vehicles for kids

If you are saving for your child’s future, and know the money won’t be needed for at least five years, there are savings vehicles that may be better than traditional savings accounts, government bonds, or CDs. Even if you already know which accounts are great for investing for your children (hint: they are the green bars in the chart above), you may not know how to open an account or if you are eligible to contribute on behalf of your children. Let’s dive into the best savings vehicles for children, advantages of each type of account, and how you can use each most effectively.

1. Roth IRAs

One of the best vehicles for saving for your child’s future is a Roth IRA, the apex predator of retirement savings vehicles. Roth IRA contributions are not tax deductible, but grow tax-free, and qualified distributions are also entirely tax-free. Roth accounts are great for children because they are typically in a lower tax bracket and will benefit from decades of tax-free growth and tax-free distributions in retirement. Roth IRAs have no required minimum distributions (RMDs), and there are many low-cost providers that offer a wide range of investment options.

Roth IRAs do have some restrictions. To contribute, your child must have earned income from a job. Household chores and other miscellaneous income doesn’t count unless they are paying taxes (children may not owe federal income tax if they earn below the standard deduction, but are still required to pay FICA taxes). They are allowed to contribute the lesser of $6,000 (2021 limit) or total taxable compensation for the year. You can offer to “match” your child’s Roth IRA contributions; Brian does this, and it is a great way to encourage children to invest, but total Roth IRA contributions can not exceed your child’s earned income for the year or $6,000, whichever is less.

How to open a custodial Roth IRA

If your children have earned income, get them investing in a Roth IRA as soon as possible. Three of the biggest custodial account providers are Fidelity, Vanguard, and Charles Schwab. Accounts can be opened quickly and easily online. Whichever provider you decide to go with, make sure they offer access to a wide range of investments without excessive fees or expenses. For younger investors, target date index funds are worth considering.

2. 529 plans

529 plans are the Roth IRAs of saving for education. Contributions are not federally tax-deductible, although you may receive a state income tax deduction in certain states. Accounts grow tax-free, and distributions used for qualified education expenses are also tax-free. In recent years, 529 plans were expanded to allow distributions to be used tax-free for eligible K-12 tuition expenses. (For those familiar with Coverdell ESAs, the expansion of 529 plans to include K-12 expenses has largely made Coverdells irrelevant since they have an income limit and a much smaller contribution limit).

529 plans do not have an income limit, and per-beneficiary lifetime contribution limits are very generous, ranging from $235,000 to $529,000 (some plans have annual contribution limits of $15,000). Contributions over $15,000 per individual per year will count against your lifetime gift tax exclusion and you will be required to file a gift tax return.

529 plans are offered through your state, and they may only offer one or two plans with limited investment options and high expenses and fees. However, you can often enroll in an out-of-state plan and get the same state tax break as you would with the in-state plan. Some states allow you to “Go Anywhere,” (the states in green, below) which means you can enroll in an out-of-state plan and receive the same tax benefit as someone in the in-state plan. These states either offer no tax break to any 529 plans, have no state income tax, or allow you to receive the same state income tax break for contributing to an out-of-state plan (it is very rare for a state to offer a tax break for any plan; those that do include Arizona, Kansas, Minnesota, Missouri, Montana, and Pennsylvania).

Other states allow you to ‘“Deduct and Run” (the states in yellow, below); in these states you must contribute to the in-state plan to receive the tax benefit, but the states allow you to transfer assets to an out-of-state plan and keep the tax benefit. “Recapture” states (in red, below) only give you a tax break for contributing to the in-state plan and will claw that tax benefit back if you transfer assets to an out-of-state plan. Be careful when choosing an out-of-state 529 plan, and make sure you know how your state treats out-of-state plans and whether or not you can get the same tax benefit. It may be worth choosing an inferior in-state plan if you are offered a generous tax benefit that you can’t get with an out-of-state plan.

How to open a 529 account

If your in-state plan is less than ideal and you can receive the same tax benefit by contributing to an out-of-state plan, consider shopping around. Morningstar maintains an annual list of the best 529 plans, and Saving for College gives all plans an overall rating, fee score, and performance score. Their website includes links to each plan’s website where you can learn more and open an account.

529 accounts can only have one beneficiary, but you can transfer from one student to another. This means if your first child doesn’t use all of the assets in their 529 plan, the beneficiary can easily be changed to the next child to attend college. If your children do end up with leftover 529 assets and there are no younger siblings or relatives for the assets to be used on, the earnings portion of distributions not used for qualified education expenses will be subject to income tax and a 10% penalty. As of the passage of the SECURE Act, a maximum of $10,000 can be used to pay off student loan debt tax-free.

3. Custodial brokerage accounts (UGMAs/UTMAs)

Custodial brokerage accounts are more flexible than Roth IRAs and 529 plans. Money saved is not earmarked for a certain purpose, like education or retirement. There is no income limit or contribution limit (but the gift tax limit of $15,000 will still apply); you can contribute on behalf of your children, and they do not need to have earned income. Up to $2,200 in earnings from a custodial account may be taxed favorably ($1,100 exempt from federal income tax and $1,100 taxed at the child’s tax rate), however custodial brokerage accounts do not have the same tax benefits as Roth IRAs and 529 plans. Accounts do not grow tax-free, and withdrawals are taxed at either ordinary income tax rates or more favorable long-term capital gains rates, depending on the holding period of the asset.

If you are saving for your children’s education, consider saving in a 529 plan. If your child has earned income, try setting up a custodial Roth IRA. If you are looking to save for other goals, and 529 accounts or Roth IRAs do not meet your savings needs, custodial brokerage accounts are a great all-purpose savings vehicle (although they do not offer the tax breaks of Roth IRAs and 529 plans).

How to open a custodial brokerage account

Many of the same providers that offer custodial Roth IRAs offer custodial brokerage accounts, including Fidelity, Vanguard, and Charles Schwab. Make sure your provider offers a wide range of low-cost investments and has minimal expenses and fees.

Honorable mention: ABLE accounts

ABLE accounts are very powerful tax-advantaged savings vehicles for those with disabilities. ABLE accounts offer tax-free growth and tax-free withdrawals when used for things like college, job training, healthcare, and financial management. If you have a child with special needs, ABLE accounts are a great way to save for their future. Brian has found the ABLE National Resource Center to be an invaluable resource for information about ABLE accounts, including who is eligible, how funds can be used, impact/limits on other government benefits, and how to open an account.

Saving for your child’s future, or even helping them learn how to save on their own, can set them up for success once they leave the nest. Saving for your children the right way means putting your own finances first. Once you have reached Step 8 of the Financial Order of Operations and are ready to start saving for their future, make sure you do it the right way. Consider utilizing tax-advantaged accounts like 529 plans or Roth IRAs, and custodial brokerage accounts if tax-advantaged accounts don’t completely meet your needs.

Even if you are working through the Financial Order of Operations and have not yet reached Step 8, you can still help your children work on their Financial Mutant skills by teaching them deferred gratification, reading personal finance staples (such as The Wealthy Barber and The Millionaire Next Door), and recognizing that time is the most valuable resource of wealth building. Download some of our free resources, including our “Wealth Multiplier for Young Savers” and resource “Are You on Track To Be a Millionaire?” to get your children excited about saving today.