The Complete Guide to Saving for College: When, How Much, and How (+ Resources)

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by Rita Cunha

College costs are at an all-time high—and don’t seem to be going down any time soon. The best way to prevent your child from graduating with a mountain of student loan debt is to start saving for college now. Are you ready for it?

Most families get spooked by how much their children’s college education will cost. They put off planning for it altogether, a move that hurts them in the end. In reality, building a college fund isn’t just for the wealthy. Once you read through this article, you’ll see it is a lot easier and more accessible than you probably think.

How Much Should You Save for College?

Financial advisors recommend saving one-third of your child’s future college costs. “But how will I know exactly what that will cost?” you ask. It’s simple.

The tuition inflation rate is around 4% annually. That means college becomes 4% more expensive every year. So, in 18 years, studying at four-year in-state public colleges will cost roughly $183,837 (a private college would be even more expensive). Thus, you should aim to save approximately $61,279 over an 18-year period—or $3,404 per year.

Yes, that can be a lot of money. Even if you can’t meet those college savings goals, you should still save whatever you can for college. Every cent counts toward not putting your child through crippling student loans and financial aid.

Plus, once you integrate a 529 plan into your college planning budget, meeting that target gets a lot easier. We’ll touch on that in a moment.

Keep in mind that most students pay less than the advertised college costs. Whether that be because they got merit-based grants or financial aid they don’t need to pay back, there’s always a chance your child’s education will cost less than you expect.

When to Start Saving for College?

The earlier you begin saving for college, the better. Investment-based college savings accounts (e.g. 529 plans) pay off when you invest in them for several years.

Although it’s only high school students who start thinking of college, building a fund for your child’s schooling should start as soon as they’re born—or shortly after. The more time you have before your child enrolls in university (be it a private or public college), the better.

That said, there are other important personal finance goals you should meet first. It’s wise to have a sound emergency fund and pay off all high-interest debt first. If you haven’t already, sit down with your family and financial advisors and make a financial planning roadmap.

The Best Way to Save: 529 College Savings Plans

Remember how we mentioned that getting a 529 college savings account makes saving for college easier? Let’s take a look at how this tax-advantage savings plan can help you afford college expenses at public and private colleges.

Who’s It For?

Usually, it’s the child’s guardians who can open a 529 account. There are no income limits or income restrictions.

Anyone can pay into the account, including any friend or family member. Contributions make awesome (and useful!) holiday gifts. In some cases, anyone who makes a contribution can claim tax breaks.

If you have a checking account, you can start saving for college today.

How Does It Work?

Every cent you put into a 529 plan gets invested. Then, as the years go on, your savings grow because of those investments.

Suppose you open a 529 and deposit $100 into it the day your child is born. If you contribute $100 per month over 18 years, you will have paid $21,600 in total. However, because your 529 plan comes with a 6% annual return rate, there will be $39,029 to be spent.

That’s the wonder of 529 accounts. It’s like getting free money.

But do keep in mind that the money needs to go toward qualified higher education expenses. These include college tuition, individual college credits, room and board, and textbooks—both for undergraduate and graduate school. Up to $10,000 can also be spent on paying off student loan debt. If your child spends 529 money on non-education expenses, they’ll be hit with a penalty and charged income taxes on the returns from the investments. 

All that said, 529 plans still allow your child to get favorable financial aid treatment. They can still apply for federal student aid and federal loans to help cover their qualified expenses.

Tax Benefits, Explained

You also get favorable tax treatment when you open a 529 account, for three main reasons:

  1. Tax-free growth: You will not have to pay taxes on the earnings you get from your investment portfolio.
  2. Tax-free withdrawals: The money your child takes out from their account for qualified education expenses is exempt from taxes.
  3. State income tax deduction: In some states, the account owner (and some contributors) can get state income tax write-offs every time you make a contribution.

All this means your child will get more of their college savings money (and not need as much financial aid), and that you can keep more of your income. You can meet with a qualified tax advisor to better understand how these perks can benefit you.

529 College Saving Plan vs Regular Savings Account

529s are your best bet. They outperform other accounts (such as the Coverdell Education Savings Account or the Prepaid Tuition Plan) for all the reasons we mentioned so far.

As if all that weren’t enough, you can boost your savings even more with a Upromise account. Link it to your 529 plan and receive over $30 as a cash bonus instantly. On top of that, you can get cashback rewards (of up to 5%) and rebates on any purchase you make—online or in-person. Siphon those perks to your 529 plan and your child will be a few dollars closer to not having to rely on financial aid.

How to Pick the Best 529 Plan for You: 3 Tips

We’ve gotten why having a college savings plan is important out of the way. Now, it’s time to settle on the best 529 plan for your account beneficiary.

1. Choose a Plan with Low Fees

You don’t need to get a brokerage account to enroll in a 529 plan. Choose one that charges less than 1% in fees to save money on pesky charges.

If you’re uncertain about what investment options to choose, it’s best to meet a financial planner. It will cost you less money and still give you the hand-holding you need in the beginning.

2. Make Sure the Investment Portfolios Are Varied

It’s best to choose a college education savings plan that gives you flexibility in your asset allocation and risk tolerance.

Many 529s offer portfolios that include diversified stocks, bonds, index funds, and other options. Some will even offer an investment plan whose risk is based on your child’s age, letting you take more risk (and reap higher rewards) when your child is young and less risk when your child’s graduation is nearing.

3. Pick a Plan that Offers Tax Write-Offs

More than half of U.S. states offer a state tax deduction for 529 contributions. That’s on top of the tax-deferred growth potential all 529s already come with.

But most of those states only give tax breaks if you choose an in-state savings account. Therefore, it’s worth considering if it’s best to get an in-state account or seek an out-of-state one (and miss out on tax write-offs). 

It might pay off to forego the state tax deductions if your state’s 529 investment options are subpar, for example. Meet with your tax advisor to make sure you’re choosing the best option. 

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