One of the most significant financial commitments you’ll ever make is sending your child to college. With tuition costs rising faster than inflation, though, planning isn’t just smart — it’s essential. Fortunately, families who start early, stay consistent, and use the right tools can reduce their financial stress.
In this post, you’ll learn how to save for your child’s college education, from tax-advantaged accounts to creative ways to involve your child.
Why Saving for College Matters
College costs vary dramatically across the country, depending on the type of institution and whether a student is an in-state or out-of-state student. Generally, public two-year colleges cost around $20,570 per year, while public four-year colleges cost $29,910 for in-state students and $49,080 for out-of-state students. According to College Board Research, non-profit private four-year colleges average $62,990 per year. Among these expenses are tuition, fees, housing, food, and books.
Multiply those numbers by four years, and you’ll easily feel overwhelmed.
The encouraging news? You don’t have to foot the entire bill yourself. It’s possible to reduce the cost of tuition through financial aid, scholarships, part-time work, and grants. The trick is to prepare as much as you can so that your child will be able to choose without being burdened with crushing student loan debt.
Start Saving Early (Even Small Amounts Count)
When saving for college, time is your best friend. When money is invested modestly over a long period, compound interest can make a huge difference.
- As an example, $100 per month saved when your child is born could grow to over $40,000 by age 18 (assuming a 6% annual return).
- If you wait until your child is 10 years old to start saving, you will only save about $15,000.
The takeaway? Save early, even if you can’t save much at first. Contributions that are small and consistent add up over time.
Choose the Right College Savings Account
Almost as important as how much you save is where you invest your money. Among the most popular options are;
529 College Savings Plans
- What they are: Investment accounts specifically designed for education that are tax-advantaged.
- Benefits:
- Contributions are tax-free.
- Tuition, books, and housing withdrawals are tax-free.
- Many states offer tax deductions or credits for contributions.
- Almost all U.S. colleges accept these funds, as well as some abroad. Also, if only one child uses all the money, you can change the beneficiary.
Coverdell Education Savings Accounts (ESAs)
- As with 529s, these accounts have similar tax advantages.
- Per child, the contribution limit is $2,000 per year.
- It can also be used to cover the costs of K-12 education.
Custodial accounts (UGMA/UTMA)
- The assets are held in the name of your child.
- There are no contribution limits, but the tax treatment is less favorable.
- If you’re concerned about spending discipline, you might want to consider allowing your child to take full control of the money at 18 or 21 (depending on your state).
Regular Investment or Savings Accounts
- The flexibility is greater, but there are no tax advantages.
- If you’re unsure whether your child will attend college or if you need funds for other purposes, this might be a good option.
Automate Your Savings
You can stay on track by automating your savings. You can schedule recurring transfers into any account you choose, whether it’s $50, $200, or even more. If you treat it like a fixed bill, you remove the temptation to spend the money elsewhere.
Moreover, as you earn more and your expenses decrease, such as daycare, you can increase your contributions.
Involve Family and Friends
Toys are often given as birthday and holiday gifts, but children will outgrow them in a few months. Instead, encourage family members to save for their education. Today, many 529 plans offer gift portals that allow relatives to deposit money directly. Often, their gift is tax-deductible as well.
This not only helps grow the fund but also reinforces the importance of education for your child.
Balance College Savings with Your Retirement
When it comes to saving for college or retirement, parents have a tough decision to make. As a general rule, plan for retirement first.
Why?
- Your child can receive scholarships, grants, or loans for college.
- You can’t borrow money for retirement.
Nevertheless, finding a balance is possible. If you can’t fully fund both, contribute something to your child’s account while maintaining your retirement plan.
Teach Your Child About Money
College preparation involves more than building a savings account — it consists in teaching your children financial literacy. As they grow, discuss with them:
- The cost of attending college.
- What student loans are and how they work.
- The difference between “dream schools” and “affordable options.”
By high school, they should understand the family budget for college and how scholarships, work-study, and part-time jobs can supplement savings.
Explore Additional Funding Sources
Despite diligent saving, some expenses may not be covered. This is where additional funding options come in;
- Scholarships and grants. Check out your high school or college’s financial aid office, or search online databases like Scholarship America. As opposed to loans, grants are usually based on a student’s financial need.
- Work-study programs. Many colleges offer part-time campus jobs as part of their financial aid packages.
- Dual enrollment/AP credits. By taking college-level courses in high school, students can reduce the number of credits they will have to pay for later.
- Employer assistance. Some companies offer tuition assistance to employees’ dependents.
- Roth IRA withdrawals. Usually, Roth IRAs are used for retirement, but not always. There are no penalties for withdrawing contributions (but not earnings, unless for qualified reasons). When you invest in a Roth IRA, your growth is shielded from taxes, making it a valuable college expense back-up.
- Permanent life insurance policy. High-net-worth families often use this strategy. As part of your premium for permanent life insurance, a portion goes toward a death benefit, and the rest builds cash value in a tax-deferred account. For college expenses, you can borrow from this cash value.
- Home equity loan. Most people’s largest asset is their home equity. Home equity loans often cover the cost of education. If you plan carefully, you can also make this a practical strategy if property values drop or repayment becomes difficult.
Adjust as College Approaches
If your child is young, you can aggressively invest in stocks for long-term growth. When they reach college age, they switch to more conservative investments like bonds and cash equivalents to preserve their capital.
With most 529 plans, risk levels automatically adjust as your child approaches college.
Don’t Panic If You Start Late
Often, parents don’t start saving until their children are in middle or high school. Even though it’s harder, it’s not impossible;
- Increase contribution amounts — redirect discretionary spending into savings.
- Encourage your child to work part-time and contribute.
- Target scholarships aggressively.
- Consider community college for the first two years, then transfer to a four-year school.
It’s important to remember that every dollar saved is one less dollar borrowed.
Keep Perspective
Getting a college degree is important, but it’s not the only path to success. A trade school, apprenticeship, or alternative education program can also lead to a rewarding and well-paying career.
As a parent, you should assist your child in making informed decisions based on their goals, talents, and financial reality, not just fund their education.
Conclusion
Breaking down college savings into easy steps makes it easier to do. Don’t wait until the last minute to start saving, choose the right savings vehicle, automate contributions, and supplement with scholarships and financial aid. Every contribution helps reduce future debt and allows your child to focus on their education instead of finances, even if you can’t save the entire amount.
It’s all about staying consistent, communicating, and seeing the end goal.
FAQs
How much should I aim to save for my child’s college?
In general, one should save about one-third of the projected cost, while financial aid, scholarships, and work cover the rest. Personalized goals can be set with online calculators.
Can I use 529 plan money if my child doesn’t go to college?
Yes.
In addition to changing the beneficiary, you can use up to $10,000 to pay down student loans. Whenever funds are withdrawn for non-educational expenses, taxes and penalties will apply.
Should I open a 529 plan in my name or my child’s name?
A parent is typically the account owner. As a result, financial aid calculations can be more favorable.
What if my state doesn’t offer a tax benefit for 529 contributions?
A 529 plan can be opened in any state. However, shop around for lower fees and better investment options.
Is it better to pay off debt or save for college first?
First, you should pay off high-interest debts, like credit cards. Then, you should balance college savings with retirement contributions.
Image Credit: Andrea Piacquadio; Pexels
