Saving for college is a big hurdle to overcome. For just one year at a public in-state college, the average cost is $27,940. An out-of-state public college cost averages $45,240 for one year. Private colleges are even more expensive, estimated to cost $57,570 per year(1).
Here are some methods, tips and accounts to consider when bulking up that college fund. And if you can’t save for it all, there are other ways to cover the cost of higher education.
The sooner you start, the better your odds of achieving your college saving goals.
You won’t know the exact cost of college until your child decides on one, but here are some averages you can use to estimate the cost when setting a savings goal:
The actual cost of attending college varies. Besides tuition, there are other costs to consider, such as textbooks, computers, room and board, living expenses and more. Aiming a little higher than these average costs can help cover all or most other college-related expenses.
Many students go to community college for a few semesters to take core classes at a lower tuition cost, which helps save money. Many AP and community college programs allow high schoolers to earn college credits before graduation. However, going out of state for college means paying more in tuition, because non-residents haven’t paid taxes to the state and, therefore, the school.
There are specialized investment options designed for college expenses, such as 529 savings plans. These plans help bypass federal income taxes on the money you withdraw and might qualify for state tax deductions on your contributions.
There are also other ways to save for college without a 529 plan, such as a straight-forward, high-yield savings account. These accounts earn rates as high as 5% APY, which is much higher than the national average of 0.45%(2).
Regardless of the savings or investment option you choose, routine contributions are by far the most effective way to save. Just saving $200 a month for 18 years can mean saving $43,200, not counting any returns on your investment. If you choose a 5% APY high-yield savings account with that contribution schedule, you could increase your return to about $70,300 — that’s $27,100 more by just choosing an account with a high rate.
It’s still a good idea to have a set savings goal for your kid’s college fund, but you should also look for some free money. Scholarships are grants that can help cover education expenses — and you don’t have to repay them. Most scholarships are awarded for academic achievements or the student’s background. Some popular scholarship types to look into include:
The amount you need to put away each month for a college fund depends on when you start saving, the estimated cost and your budget.
If we separate cost by the type of college and assume you’ll be saving for 18 years, here’s how much you’d have to save each month without any investment or interest earnings:
| Type of four-year college | Estimated tuition cost | Required monthly savings to meet goal |
|---|---|---|
| In-state public college | $111,760 | $517 |
| Out-of-state public college | $180,960 | $837 |
| Private college | $230,280 | $1,066 |
Choosing the right savings account for your kid is a key factor in meeting a college funds’ saving goal. The right account for your situation can mean having to save less each month out of pocket — or even surpassing the original goal.
A high-yield savings account (HYSA) is just like a traditional savings account, except it offers higher yields. Instead of offering an APY around the national average — less than 1% — you can get rates well into the 5% range.
However, the downside with these is that you’re typically limited to six monthly transactions, there may be a minimum opening deposit requirement and they don’t come with tax advantages that many college savings plans offer.
A Roth IRA is a type of retirement account — but you can use the funds for college expenses. Roth IRAs don’t have employment or age restrictions, so you can open one for the benefit of your child. You can set aside after-tax income, so it offers tax-free growth.
But tax-free withdrawals are only available after age 59 ½, so college students won’t get that advantage. There are also contribution limits: Both traditional and Roth IRAs don’t allow you to contribute more than $6,000 per year. If you intend on saving for 18 years, a Roth IRA means you can only contribute up to $108,000.
A very popular college fund option, 529 savings plan are investment accounts designed to help you save for a beneficiary’s college expenses with high contribution limits and tax benefits. Choose between a prepaid tuition option, which lets you purchase tuition credits, or a college savings plan, which lets you invest after-tax contributions into a variety of investments.
529 savings plans are worth it if you plan to use it toward qualifying educational expenses. If the funds aren’t used for education, you may get hit with a penalty fee and owe taxes. Also, these plans can impact student aid eligibility if the account is owned by the student.
Custodial accounts like those under the Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) hold and protect funds until the beneficiary is 18 to 21 years old, depending on where you live. They allow the account holder to invest the funds in various securities and offer tax advantages, making them effective college savings options.
On the downside, these accounts are considered student assets, so they can lower a student’s eligibility when they apply for financial aid.
The government issues College Savings or Federal Savings bonds as a safe investment vehicle. A savings bond earns a fixed interest rate and receives the principal amount plus interest at the date of maturity. Funds are difficult to access until maturity, which ensures the investment is used for its intended purpose. You might also be able to avoid taxes(3) on the interest earned if they’re used for college education.
But depending on the type of savings bond, it may take 20 to 30 years to fully mature, and there’s the upfront cost to consider, which can be anywhere from $25 to $10,000 to the penny(4). And if you don’t buy all the bonds at the same time or plan it out where they mature at the same time, you may not have all the funds available when your child enters college.
Similar to 529 savings plans, Coverdell Education Savings Accounts are custodial accounts that allow you to invest money toward future school expenses. You can invest the money in a number of securities with tax-free earnings growth and tax-free withdrawals when spent on eligible expenses. Unlike 529 plans, you can use Coverdell ESAs for primary and secondary school.
One of the biggest downsides is that you’re only allowed to contribute up to $2,000 per year, or a total of $36,000 for 18 years. But that total contribution limit doesn’t include possible earnings with your investment choices.
A whole life insurance policy can protect you and your family, but it can also be used to pay for college. And life insurance doesn’t count as an asset if your child has to apply for student aid.
Policies are broken down into a death benefit amount and a cash-value portion. Whole life insurance offers insurance for a lifetime and the premiums stay the same. With each premium you pay, part of it goes toward the cash value portion of your policy and grows on a tax-deferred basis. The interest rates are typically low, and you won’t be taxed — allowing it to be treated partially as a savings fund. After you’ve built up enough cash value, you can borrow from your policy, which you can do to cover college expenses.
But life insurance comes with a myriad of fees, and it can take between 10 to 15 years to accumulate enough cash to start borrowing against your policy. Also, you may have to pay interest on the loans against the policy.
Because many college savings plans include investments, consider speaking with a financial advisor or accountant for guidance on:
Even with so many options available to save for education, most people won’t have enough to cover the full cost of college. Luckily, other options can help you fund your child’s college education:
While the cost of college is getting out of control, it’s a low on the list of worries for most Americans as just 42% say they are concerned about the cost of college compared to 86% who are worried about the price of gas.
If you start early, set goals and look for areas to save, your contributions toward a college fund for your kid could eventually make a huge impact. Compare the best investing options or bank accounts for your kid to find a product that fits your budget and goals.
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