Saving and Investing

How to Pay for College

Discover the average cost of attending college, plus five popular ways to pay for it, including 529 plans, federal aid, and UGMAs.


EarlyBird Team

Last updated:

February 13, 2023

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

You don’t need to have three doctorates to know that college isn’t cheap. 

The average college cost goes up almost 7% each year like clockwork — and that can be a pretty daunting prospect if you’re worried about how the children in your life are going to pay for college in 10 or 15 years’ time.

Fortunately, there are plenty of options when it comes to how to pay for college. But, as always, some options are better than others.  

Universities and colleges offer scholarships and aid packages, you can take out a federal student loan or private student loan, or you can save over time using a custodial account, 529 plan, or a Coverdell Education Education Savings Account (ESA).

This guide offers a breakdown of the average cost of college, explains the pros and cons of different college payment methods, and details how setting up an UGMA custodial account for a child in your life with EarlyBird can help you save smarter.


Breakdown of College Costs

If you’d like to give your loved ones the best possible start in life, a college degree is a pretty fantastic place to start.

College isn’t for everybody, sure. But college graduates earn 80% more than those without a degree. 

Unfortunately, those enhanced career prospects go hand-in-hand with a pretty hefty price tag. The average cost of attending college in the U.S. is now sitting at a whopping $35,720 per year.

As a point of reference, that’s triple the annual cost that students paid to go to college 20 years ago, with an annual growth rate of 6.8%. 

That growth rate is important to bear in mind — because if you’ve got a newborn baby in your life whose future you’re worried about, the numbers suggest you’re going to need a lot more than $35,720 a year in 18 years’ time.

There are lots of extra costs you’ve got to consider, too. Tuition is just the tip of the iceberg.

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Let’s break the numbers down.

The average private university student spends a total of $53,949 per year at college. 

But even the average in-state student attending a public four-year institution spends an average of $25,615 for each academic year.

Because that’s one of the lowest numbers you could be dealing with at this point, let’s further explore the cost of attending a public four-year school.

First and foremost, you’ve got tuition to think about. At a public four-year college, the average in-state tuition and required fees you’ll need to pay currently total an average of $9,308 per year. If you’re considering an out-of-state university, those tuition costs instantly jump to $26,427.

Next, there are books and supplies. At public four-year institutions, each student is expected to pay an average of $1,334 per year on their textbooks and course supplies.

Then you have room and board. At public colleges, students who are living on-campus average annual accommodation costs of $11,451. It’s generally a little bit cheaper to live off-campus. But even then, the annual average cost for off-campus living is $10,781.

Finally, there’s everything else. College isn’t all about sitting in dark libraries and lecture halls. You’ve also got to consider entertainment, travel, and everything in between. Students typically spend an extra $3,493 per year on those additional expenses.

Translation: college is frighteningly expensive. Most of us haven’t got that much cash lying around, either.

But there’s a light at the end of the tunnel. If you plan ahead and start investing today, you can help liberate the kids in your life from that daunting cost of tuition and fees in the future.

How Do People Pay for College?

The hard numbers and breakdown of college costs might seem like a lot to stress over. But the truth is there are a variety of financial options you can turn to when trying to save up to help the important kids in your life pay for their future college tuition.

Each funding opportunity comes with its own set of pros and cons — and it’s important to bear in mind that what works for one family might not be quite right for others. 

That’s why it’s essential that you do your homework and figure out the most efficient and affordable way to help your loved one pay for college.

To help cover all your bases, let’s break down a few of the most popular college funding options families pursue.

Financial aid

Financial aid is one of the most common forms of college funding. Two-thirds of all U.S. students apply for federal financial aid through the Federal Application for Student Financial Aid (FAFSA).

The FAFSA is the financial aid application form overseen by the U.S. Department of Education that most colleges and universities ask incoming students to send in. Every year, millions of students complete a FAFSA and receive over $150 billion in financial aid.

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The FAFSA is totally free to complete and send out — and no matter what school someone has applied to or what year it is, the FAFSA deadline is always the same. The government deadline to submit a FAFSA application is always June 30 after the school year in which financial aid is needed.

The college will then also use that form to determine what sort of federal financial aid the student is eligible to receive from them, as well as any institution-specific aid they may qualify for.

Federal Student Aid (FSA) offers three main types of financial aid:

  • Grants
  • Work-study
  • Loans
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Grants are financial awards that don’t have to be repaid. They are normally awarded based on financial need — although other considerations may include the student’s background, country of origin, academic merit, or just about anything else.

Next, you’ve got Work-Study. This is a federal work program that both undergraduate students and postgraduate students can use to earn money while they study to help pay for tuition and associated costs.

Around 18% of all U.S. undergraduate students earn money through the FSA’s Work-Study program. The average annual income for eligible undergraduate students is $1,794 per year.

To receive Work-Study funds, the college student will need to qualify for the program and then secure a job. The income that they earn isn’t directly applied to their tuition either, so they’ll have to allocate it themself.

Finally, there are student loans. This is money that a student or parent/guardian borrows to pay for college tuition and costs. Unlike grants, you must repay loans with interest.

Loans are an incredibly common tool that students and their families use to pay for college. But there are a few different loan types and loan rules you’ll need to consider.

Student loans

There are two types of student loans college students will typically explore: federal loans and private loans.

Federal student loans enable students to borrow college funds backed by the U.S. Government. There are a few different kinds of federal student loans, and they all come with a couple of unique benefits you won’t typically find with private loans.

  • Direct Subsidized Loans are federal student loans in which the U.S. government pays interest on your loan while you’re studying or during a period of loan deferment.
  • Direct Unsubsidized Loans are government-backed loans in which you’re responsible for all loan interest.
  • Direct PLUS Loans are for graduate school students or the parents of undergraduates.
  • Federal Perkins Loans are made by participating schools and don’t allow interest to accrue while you’re in school, during grace periods, or in periods of deferment.

One of the biggest benefits of federal student loans is loan forgiveness. There are a variety of federal student loan forgiveness programs that enable students to have their remaining student debt written off after a number of years or depending on their personal circumstances.

That sort of benefit is rarely extended if you go for a private student loan. That being said, private college loans have a couple of benefits, too.

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With private lenders, you won’t generally need to fulfill as many eligibility requirements to qualify for a student loan. That being said, the student or their family will often be required to pass a credit check or add a cosigner onto the loan.

A lot of private student loans also have variable interest rates — which means that your payments could rise or fall dramatically in the future based on market conditions. 

Federal student loans typically have fixed interest rates, so your payments will always be the same unless you’re told otherwise.

Some private student loans do offer interest deferment, while others don’t. That’s why you’ve really got to do your homework and shop around to make sure you’re getting a good deal if you decide to go for a private loan.

529 plans

529 plans are a type of tax-beneficial investment account that lets families save for the future educational expenses of their children. 

529s can be used to cover anything from kindergarten right through to grad school — but the catch here is that you can only withdraw money for certain qualified educational expenses.

What constitutes a qualified expense is ordinarily dictated by your state government and 529 provider, and it can be fairly rigid. 

Most plans cover tuition, on-campus accommodation costs, necessary admin fees, and that sort of stuff. Buying a new laptop for college or plane tickets to visit home aren’t usually allowed.

There are two main types of 529 plans: prepaid tuition plans and college savings plans.

Prepaid tuition plans allow you to effectively “buy” tuition for college credits in chunks in advance. Savings plans are designed to let you accumulate cash over time and then apply that as necessary when the child is ready for school.

It’s important to note that 529 plans are run by state governments, and so each state has different rules about how their own 529s work.

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529 plans are an incredibly popular way to pay for college — but there are a few important things to consider.

529 plans don’t have annual contribution limits, which means you can save as much as you’d like, up to a total cap amount, set by your state, typically ranging between $235,000–$529,000.

But contributions are considered gifts by the Internal Revenue Service (IRS). That means you can only contribute to a 529 tax-free up to the current gift tax exemption of $15,000 per year. Any amount you contribute after that will be taxed.

But the biggest pull with the 529 is that all earnings generated by the plan are tax-free as long as it is used for education expenses. If you take money out of a 529 for a non-qualified education expense, you’ll not only be taxed, you’ll also incur a penalty at a rate of 10%.

UGMA custodial accounts

Another increasingly popular option to help pay for college is a custodial account.

A custodial account is an investment vehicle adults can use to save for important kids in their lives — and they’re pretty simple. An adult sets up an account on behalf of a minor beneficiary and then acts as the custodian over the assets. 

That means the adult has control over investments and how money is managed, but they don’t own it. 

Everything in a custodial account legally belongs to the child beneficiary — and when that beneficiary reaches the age of majority, the custodianship ends, and they get control of everything in the account.

There are two main types of custodial accounts: Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. 

Both are pretty similar and include the same tax benefit insofar as the earnings accumulated in a custodial account are taxed at the child’s rate up to a certain threshold.

The key differences are that UTMA accounts aren’t allowed in all 50 U.S. states, and they can hold less common asset classes like fine art, intellectual property, and real estate. 

Because most families don’t have a need to keep assets like that in a custodial account, UGMAs are the more popular option.

Custodial accounts do have an advantage over 529 plans because they aren’t bound by rigid withdrawal rules. 

After the beneficiary reaches 18 — or 21 in some states — they’re allowed to use the funds in their account however they wish. That means students can use what’s in a custodial account to pay for college expenses like travel, entertainment, or off-campus accommodation that a 529 plan wouldn’t cover.

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But because the 529 plan does have some attractive tax advantages, a lot of people tend to set up both a 529 plan and an UGMA account, so that the children in their lives are set for all kinds of expenses. 

That means the children you care about will be able to focus on doing amazing in school without having to work a ton of hours at a part-time job.

Coverdell ESA 

Another popular college funding option worth considering is a Coverdell Education Savings Account (ESA). 

A Coverdell ESA is a tax-deferred IRA account designed to help families pay for future education expenses. Just like a 529 plan, ESAs let you boost your investment earnings through tax deferral as long as you’re using the money for qualified education expenses.

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That being said, funds you save in a Coverdell have got to be used by the time your student reaches age 30. Otherwise, you’ll be subject to taxes and penalties on any withdrawals.

The other big sticking point with Coverdell ESAs is that they’ve got a pretty low contribution limit of just $2,000 per year.

How Can EarlyBird Help You Pay for College?

No two situations are alike, so you need to do your research and choose the college payment method that works best for you. But if you want to know how to pay for college using a flexible and simple investment vehicle, you should be checking out EarlyBird.

EarlyBird helps you to set up a dynamic and easy-to-use UGMA custodial account for the important kids in your life. 

Not only do you get all the benefits that go hand-in-hand with a custodial account (like no contribution limits and flexibility around withdrawals), but you can also choose from a range of investment portfolios to match your savings goals.

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When it comes to how to pay for college, the big advantage of an app like EarlyBird is that it helps you cover all your bases. You might find setting up a 529 plan or another savings account for a child in your life is a great, tax-advantaged way to pay for future tuition fees.

Yet by dividing your eggs between a couple of different baskets, you’ll be able to make sure that the kids you love can not only pay for their tuition — but also won’t have to worry about travel, fun, food, or anything else while they’re in college.


At the end of the day, we all know that college isn’t cheap. But don’t despair because if you plan ahead and invest wisely, you can help the children in your life pay for college without breaking a sweat.

We all want what’s best for the kids in our life. Crippling student debt that takes 30 years to pay off isn’t something most of us would wish on anybody. Fortunately, there are plenty of great funding options to help you pay for college. EarlyBird is definitely one of those options.

With EarlyBird, you, your family, and friends can start building a nest egg early so that by the time your loved ones are ready for college, they won’t need to worry about how they’re going to pay for it.

Download EarlyBird in the app store today to start investing.


This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.


EarlyBird Team

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Download EarlyBird today and start investing in your child’s tomorrow.
Get started with your first $10 on us, when you create an account today!
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
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