How to Save for College: The Ultimate Guide for Parents and Students

For many, college is a door to a prosperous future, and it elevates feelings of excitement and brings a taste of freedom. It’s a younger student’s chance to become an adult, learning both life and book smarts. It’s an older student’s opportunity to broaden their horizons and grow their passion or career. For whoever is paying for college, it’s often a wave of financial stress and uncertainty. When Americans owe a collective $1.5 trillion in student debt, you’re probably wondering how to save for college. 

Student loans make up 11 percent of the cumulative debt in the U.S., surpassing auto loans and credit card debt, and they maintain the highest rate of delinquency across all debt types. That’s no surprise when 43 percent of adults who attend college incur some amount of debt, and 24 percent of those have depended on credit cards to pay for school. 

In 2018–19, the average cost of one year at a four-year, in-state public college was just over $21,950. If your student is looking to get away from home a few states over, that cost will nearly double to $38,330, then climb even higher to $49,870 for a private institution. The average cost of tuition has continued to rise over the last decade, which is why it’s more important than ever to understand how to save for college and build an accurate education budget. Whether you’re saving for a child or planning for your return to college, we have tips to help you pay the bill.

When to Start Saving for College

How Much to Save for College

Tips on Saving for Your Child’s College Fund

Types of College Savings Plans

Tips on Saving for a Teen or Adult

Financial Resources for Students

When to Start Saving for College

The obvious answer here is that the sooner you start saving, the better. Even if all you can put aside is $20 a month, that will be $240 in a year and you’ll have nearly $1,000 in four — and that’s way better than nothing. If you choose the right savings account, that amount may even be tax-free. As it stands, just 56 percent of parents save for their child’s education with an average of $18,000 saved — just short of the one-year $21,950 average for in-state tuition.

The average interest rate on student loans is just over five percent, and the average student loan balance reached $35,830 in 2018 — which would produce $1,791 in interest every year. When the median salary for an entry-level job in the U.S. is just over $30,000, it’s no surprise that graduates have trouble paying their bills and often delay their payments, putting their loans in forbearance, and doubling or even tripling their repayment. Proactively saving is the best way to build financial security for your student’s future.

How Much to Save for College

The average cost of public, in-state tuition is about $21,950 a year according to CollegeBoard, which means if you want to cover your child’s total undergrad cost you need $87,800. If you’re a super planner and start saving as soon as you have a child, you’re looking at 18 years of savings and putting away nearly $4,900 each year.

In reality, you don’t know if your child will graduate in four years, want to go out of state, be accepted to a private college, or stay home and get a bachelor’s from your backyard. Some employers also offer tuition assistance to their employees and families, so it’s a good idea to negotiate these benefits where you can over the years. Keep an eye out for new assistance and savings programs to enroll in as they come out.

Saving for college is important, and so is saving for retirement and maintaining an emergency fund. It can feel like a balancing act, but all of these investments are necessary for your lifelong security. Ultimately, you should save what you can afford. It’s recommended that 20 percent of your income go into various savings accounts, so split that between the three as you see fit.

Tips on Saving For Your Kids’ College Fund

The great part about saving for a child is you have plenty of time to build the account and collect interest. The bad news is that it’s hard to determine how much you’ll need in the future, and it’s easy to cut your investment into the account for other, more pressing needs. Check out these tips to help you save for college.

1. Start Saving Early

The earlier you begin to save, the more you can directly invest in the account, and the more interest you accumulate over time. It’s also a huge relief to have a plan in place before your child hits high school, when you’re suddenly wondering how you’re going to save while paying for driver’s ed and a new wardrobe every six months.

The other huge benefit is that when you build the account over time, you won’t have to sacrifice your retirement investments or other financial goals. Contributing a little over time allows all of your accounts to grow and accrue interest, and you can better plan your future.

When you have at least 15 years to invest, 529 accounts and Education Savings Accounts are great routes to consider. Each is a tax-free account, and other people who want to give to your child’s education, like grandparents and uncles, can easily invest, too.

2. Build Long-Term Goals

After you choose an account, it’s important that you set realistic goals for your investment. You likely have a hard deadline — your child’s senior year of high school. From however old they are now to their 18th birthday is the perfect timeline for you to work with. Decide how much you can save each month and multiply that by the months until their 18th to know how much you can save, or divide a goal amount by the months to determine how much you need to put away each month.

You should also consider how the future costs of education may change by the time your child is attending school. The average tuition cost has tripled since 1990 for public four-year colleges, after adjusting for inflation. If this continues, the costs of public, in-state tuition could easily reach six figures in the next ten years.

3. Choose the Right Plan

Choosing the right savings plan for your goals is vital to getting the most out of your investment. Obviously, the higher the interest rate, the better. The average interest rate offered by a traditional savings account is .06 percent. Other traditional savings options, like Certificates of Deposits (CD), can boost that as high as .51 percent if you elect for a 60-month CD. Online savings accounts can push that even further, reaching as high as 1 percent interest on your investments.

College-specific savings plans, like the Coverdell Education Savings Plans and 529 plans, are also great opportunities for long-term investments. They work a lot like mutual funds and are dispersed among stocks and bonds with the intention of gaining a larger return, faster than traditional interest rates could provide.

Types of College Savings Plans

Depending on how much you can invest and your timeline, there are several savings options to choose from. Everything from traditional savings accounts to prepaid tuition agreements can help you save on educational expenses.

529 College Savings Plan

The 529 savings plan works by investing your contributions into stocks and bonds for a higher return. Not only are you receiving a return on your investment, but the money is tax-free when used for education expenses and may earn you a tax deduction, depending on your state. Also, anyone can contribute to the fund, and each contributor can claim a deduction on their taxes.

The important thing to keep in mind with these accounts is that there is some risk in the investment, and you can choose your account by how much risk you’re willing to take on. If you withdraw the funds for another, non-educational use, you have to pay taxes and a 10 percent penalty on the amount withdrawn. However, the beneficiary can use the money for education at any age, and if your child decides not to attend college, the account can be transferred to another beneficiary.

529 Prepaid Tuition Plan

The 529 prepaid tuition option is still a tax-advantaged savings option, like the 529 savings plan, but it can only be used for college tuition and it doesn’t cover room and board, or other educational expenses. Essentially, this plan allows you to secure the current tuition price for your student, which can be huge considering the cost of college continues to rise.

The major disadvantage of this option is that it’s only available in participating states and colleges. You can still invest in a plan outside of your own state’s options, but you lose some tax advantages and the college options are still limited.

Coverdell Education Savings Accounts

The Education Savings Accounts (ESA) are similar to 529 plans, but do limit how much you can invest each year ($2,000) and who is eligible. Couples earning more than $220,000 a year can not invest in an ESA, and the fund must be used by the time the child is 30, or the account will be taxed.

The benefit of the ESA is that it can be used for any education expense throughout the child’s lifetime, even covering private school and academic tutoring. Until the age of 30, the funds are also tax-free and have more flexiility than the 529, which has no guarantee of returns.

Custodial Savings Accounts

Custodial accounts are simply accounts set with a bank, by an adult, and for a minor. These will offer your standard savings account interest rates of around .06 percent. The real benefit of setting up a custodial account is that it’s much more flexible with minimums, contribution limits, and withdrawal penalties than traditional savings accounts. However, the account is in your child’s name, so it could largely impact their financial aid prospects and grant opportunities.

This account is great if you’re unsure of how much you can continue to contribute to the account, and it can still earn you some tax benefits since the funds will be taxed at the child’s rate. Additionally, the beneficiary can use the money however they like, so if you save more than college costs, they can use the money for other investments.

Tips for Saving for College as a Teen or Adult

Saving for a teen or adult can be trickier and a lot more stressful than saving for a young child. That doesn’t make it impossible. With the right investments and budgeting strategy, you can save enough to cover a semester or more, which will significantly reduce your debt and total paid into your education.

1. Start a Specific Savings Account

You likely already have a general savings account, one for retirement, or even a vacation fund. When you decide it’s time to start saving for college, it’s important you establish a specific account for this fund. Most Americans don’t know what they spent last month, so it’s no surprise that it’s really easy to overspend if you don’t have a separate account. Set an automatic deposit to this specific account every month, and it will accumulate without you even having to think about it.

2. Plan For More Than Tuition

Tuition is the big cost everyone is always talking about, but if you’ve never been to college it can be shocking how much textbooks, lab fees, and transportation really adds up. Textbooks alone can cost $1,200 a year. Plan ahead so you can focus on school and not how you’re going to buy your calculus book.

3. Look for Unexpected Places to Save

The costs add up, but there are a lot of ways you can save on your college expenses. Picking up an hourly job is a great way to cover your living expenses. Check out what jobs your college has available to stay on campus and save on transportation. You can also apply for work-study programs that prioritize civic education and experience for your major.

If on-campus room and board are out of your price range, check out nearby houses and apartments for rent. More often than not, you can save by living off-campus with a couple of roommates. Keep in mind that you will be responsible for utilities, groceries, and transportation, so make sure to thoroughly consider and compare the true costs of each.

You can also cut that huge textbook budget down by renting or buying used. If you have to get the newest edition, see if your library has it available to borrow or if you can request an interlibrary loan. If you go this route, make sure you have a friend with the book in class as a back-up, in case someone else borrows it before you or you can’t make it to the library. If the library isn’t an option, see if you can rent or buy a digital edition to save.

4. Start Saving Now

It’s absolutely never too early to start saving. Once you decide you want to go to college, start a savings account and begin contributing. Figure out what you can save each paycheck, how much you need, and then establish a goal. Budgeting and savings apps can help by automatically contributing a set amount every month, or even sending digital “spare change” into savings. Figure out what works best for you and begin now.

Additional Resources

If you can’t pull together enough to cover your full tuition, there are still several ways you can get money for college. Explore the chart below to discover several additional ways to get financial assistance for college.

Grants

Grants are free money to help you cover the cost of your education and are awarded by financial need and chosen through an application process. Most grants come from your federal and state government when you submit your FAFSA, but you may also be eligible for grants from your college or university, or a local nonprofit.

While it’s free money for education, many come with stipulations, and if you drop out of school or your eligibility changes, you may have to repay all or part of the grant.

Scholarships

Scholarships are also free money, but they’re usually awarded for achievement or prestige. The biggest scholarships can be highly competitive, but many local scholarships may only have a few applicants or even go unclaimed.

Get creative with your scholarship hunt and you’ll find a variety of opportunities from employers, non-profits, local businesses, and even individual community members. The hardest part about earning a scholarship is putting in the work, as they can be hard to find and often require extensive research and writing to apply. It’s part of the weeding out process, but scholarships aren’t only for honor students and football stars.

Federal Financial Aid

If you’ve ever talked to someone about going to college, then you’ve probably been told to file for FAFSA (Free Application for Federal Student Aid). FAFSA asks for information on you and your family’s income, savings, and investments. They use this information to determine how much aid you’re eligible for from the federal government, and then give you options for grants, subsidized, and unsubsidized loans.

It’s a yearly process that every student should participate in, even if you have money saved to cover tuition. A few minutes online could earn you a grant you didn’t know you were eligible for.

Student Loans

Student loans come in three forms; subsidized loans, unsubsidized loans, and private loans. Before you take out any loans, it’s important you understand each to make a healthy financial decision.

1. Subsidized loans are federal student loans for graduate and undergraduate students with financial need. Your school determines the amount you receive by your level of need. While you’re in school, six months after you graduate, and if your loans go into deferment, the U.S. Department of Education will pay your interest — currently 5.05 percent for undergraduate loans. Income-based repayment plans are available.
2. Unsubsidized loans are federal loans available for any student to borrow, regardless of need. The amount is determined by your school based on the cost of attendance, and you are fully responsible for all interest accrued — currently 5.05 percent for undergraduate loans. Income-based repayment plans are available.
3. Private loans are student loans provided by third-party lenders, banks, or credit unions. These loans often have higher interest rates than federal loans and may require a co-signer. You are fully responsible for the repayment and interest of these loans, and you may have to begin repayment while in school.

The exorbitant and still rising cost of higher education means you need a plan to stay financially secure and cover tuition. From education savings plans to grants and scholarships, there are plenty of opportunities to get you through school and into your career dreams.