How Much to Save for College? The Ultimate Guide

As a parent of a 3-year-old, I’m just trying to get through my daughter’s current tantrum phase— figuring out the best way to save for college feels all but impossible. Even though I started saving early, it’s tough to shake the anxiety over whether I’m saving enough. Many parents may find themselves in a similar boat, unsure about how much to save or even how to get started. Despite scary headlines about soaring college tuition prices, it turns out that preparing for your child’s educational future is totally doable. Really. Here are some key facts and figures to help you build a strong plan for your child’s future college education.

*Note: Figures accessed November 2024.

How Much to Save for College?

Let’s be blunt: Not everyone can realistically cover 100 percent of college costs, even if they start saving before their children are even born. On average, tuition inflation rates averaged 3.63 percent annually from the 2010-2011 to 2022-2023 academic years. Tuition costs at public, four-year colleges increased 36.7 percent during that time. In 15 years, assuming 5% annual cost increases, four years of in-state, public college could cost over $223,000, and private colleges could cost more than $525,000 (figures accessed in December 2024 using current average tuition numbers).

There are small ways to fit college savings into your budget, such as saving where you can and making sure your family is on a budget that you can follow into the future.

What you can do today: Take a deep breath. Figuring out how much is right for your family requires a little nuance, but there are multiple strategies you can use to make college affordable. This may also be a nice time to talk to your children about how they can get involved in saving, too.

Don’t Focus on 100 Percent

Rather than “deciding” you’ll fork over $180,000 (or more than double that) without a plan for how you’ll get there, consider getting specific. Maybe you’ll pay for public school but expect your child to cover the difference if she wants to go private. Maybe it’s more realistic to pay for half the costs and expect your child to cover the other half in loans.

Perhaps most importantly, don’t get spooked by prices, because you may not have to pay the whole thing. Over 87 percent of first-time, full-time college students at four-year schools accepted financial aid for the 2021-2022 academic year. The average financial aid for full-time undergraduate students came to $16,360 for the 2023-2024 school year.

Find Your Own ‘Best’ Way to Save for College

Your best way to save for college will depend on various factors, like how much aid you expect to receive, your family’s income and whether you’re aiming to send your kids to an in-state, public school or a pricier private college.

One rule of thumb you can use to estimate future college costs is the “one-third” rule: Aim to cover one-third of college costs with your savings before your child starts college. One-third comes from financial aid and your contributions from income during the time your child attends college. The last third comes from student loans.

You can also try some simple math to see if you’re on track with current savings, based on your child’s age and the college path you’re planning:

• In-state, four-year public college: Multiply your child’s age by $3,000 (e.g., a 6-year-old child is 6 x $3,000 = $18,000 target).

• Out-of-state, four-year public college: Multiply your child’s age by $6,000.

• Private, non-profit, four-year college: Multiply your child’s age by $8,000.

What you can do today: Consider what type of school you plan to send your child to, and multiply their age by the figures provided here to get a quick check of whether you’re on track or need to step up your savings.

Why It’s Important to Start Early

Starting as early as possible gives your money the most time to grow. If you saved $150 per month starting when your child was born, you could have $32,400 after 18 years, without factoring in any earnings. If we were to assume a 5 percent rate of return and 0 percent taxes (because, in this theoretical, you saved in a tax-advantaged 529 account), that’d climb to about $52,000. Of course, investing doesn’t guarantee a return, and your rate of return depends on your investments and how the market performs.

What you can do today: Pause and really let that sink in. Starting early is likely to be the easiest way for you to hit your goals.

What Is a 529 Plan? And Other Considerations

Once you start looking into education savings accounts, you’ll probably hear one number over and over: 529. Named for the section of tax code authorizing them, 529 plans are tax- advantaged savings plans designed for education expenses.

There are two types, a 529 savings plan and a 529 prepaid tuition plan. Residents of all 50 states and the District of Columbia can open a 529 plan (Wyoming does not offer its own plan, but residents can join an out-of-state plan), and depending on where you live, you may be able to deduct both kinds of 529 contributions from your state income taxes.

Deductible 529 contribution limits vary by state. In 2024, you and your spouse can each give up to $18,000 per child before you exceed the annual gift tax exclusion.

529 education savings account

As with other investment accounts, the idea is to accrue interest and investment growth over time. The money in your account grows tax free, and if you use withdrawals for qualified expenses, you won’t have to pay federal taxes. In many cases, distributions for qualified expenses are exempt from state tax, too, although Alabama imposes tax on distributions from a 529 plan purchased in another state.

What are qualified expenses? For college students, tuition, fees, textbooks, and room and board would be considered qualified expenses for a 529 savings plan. Up to $10,000 per year in private, public or religious elementary or secondary school tuition also counts as a qualified expense.

The tax-free growth on your 529 savings and the tax exemptions for most education expenses generally means you may end up with more money than if you’d earned the same rate of return in a regular mutual fund with the same portfolio holdings, which is subject to income and capital gains taxes. (If you withdraw money for a reason other than education, your earnings will be taxed and hit with a 10 percent penalty. California adds its own 2.5 percent penalty on top of that for non-qualified distributions.)

529 prepaid tuition plan

This kind of plan lets you purchase credits toward tuition and fees at today’s rates for a select list of colleges (often, but not always, public universities in your state). That means you don’t need to worry about rising tuition costs, but prepaid plans restrict where your child can use the funds and what the money will cover. Room and board, for example, typically isn’t covered.

If your child wants to go to a college that isn’t covered, any prepaid tuition plan will let you use funds toward tuition at other colleges or universities. Some state prepaid tuition plans pay out based on weighted average tuition and required fees for in-state public institutions, including community colleges (which are often cheaper, and can keep the average low). If your child attends a college other than the participating colleges in the prepaid tuition plan, the plan might pay less, so it’s best to choose this type of plan only if you’re fairly certain where your child will go to college.

One drawback of a prepaid tuition plan is this 529 option is harder to find. Only seven programs are still accepting new applicants as of November 2024, and many of them come with state residency requirements.

Another downside is that not all state governments guarantee the money you contribute. Florida, Mississippi, Massachusetts and Washington guarantee contributions with the full faith and credit of the state (as of 2024), meaning the state will supply funding if the program runs into financial difficulty. To be clear, these states are guaranteeing participants’ contributions, not the growth of their money. Other states may only promise to reach out to legislators if funds run short, and legislators are not obligated to act. If the plan’s financial sponsor can’t keep up with demand or the state’s investments underperform, the state may not have the funds to cover each student, making this a riskier choice than many parents imagine.

To be clear, 529 college savings plans aren’t guaranteed, either. But they’re not based on locking in a lower tuition rate, so they don’t seem to face the same underfunding struggles that prepaid plans do.

Roth IRAs

Although Roth IRAs are officially intended for retirement savings, Orsolini notes that they often work well for parents trying to save for retirement and college at the same time. That’s because early withdrawals from a Roth IRA aren’t subject to the usual 10 percent penalty if you use the money for higher-education expenses. You can also avoid taxes if you withdraw only contributions, not earnings.

Coverdell education savings account

Coverdell ESA plans are another, less popular option. As with 529 plans, contributions grow tax- free. Coverdell plans have the advantage of including a broader range of K-12 expenses, like uniforms or room and board at a private school, whereas 529 college savings plans only cover K-12 tuition.

That said, Coverdell plans only allow a maximum $2,000 annual contribution per child and you can’t use this sort of plan once you hit certain income limits. If you file taxes as an individual, your contributions face limits when your modified adjusted gross income reaches $95,000, or $190,000 for married couples filing jointly. As a result, they aren’t the best answer for many families.

What you can do today: Simply decide what type of account is right for you. That’s it.

Where to Find a 529 Plan

You’re generally free to open a 529 in any state, not just your home state, although there may be tax benefits for going with your state’s specific 529. SavingForCollege.com offers a comprehensive listing of 529s across the country, along with reviews.

What you can do today: Create a calendar alert to sit down and spend a couple hours researching various 529 or other plans, and open an account. Trying to do everything all at once can be overwhelming, so you might choose a time when you know you’ll be unhurried and can really do it right.

Breaking Down the Process: How a 529 Affects Financial Aid

1. You fill out a FAFSA form, providing information about your financial situation.

2. Administrators calculate your expected family contribution, which is how much you’ll

   have to pay out of pocket.

3. Starting in the 2023-2024 academic year, the asset protection allowance ended, so the

   FAFSA considers any qualifying assets to calculate your contribution.

4. Certain assets, including money in retirement accounts and your primary residence,

   don’t count for FAFSA purposes, which is good news for you.

5. Your assets are assessed at up to 5.64 percent, including money in any 529 plans. So, if

   you’ve saved $10,000, your financial aid package would only get dinged by up to $564.

Anyone telling you that a 529 education savings account will hurt you is essentially saying, “Don’t bother saving $100, because you’ll only get to use about $95.”

Thanks to a recent change in how the FAFSA works, students no longer have to report distributions from grandparent-owned 529 plans as their own income (and face a larger cut on need-based financial aid). College students don’t have to report cash support on the FAFSA, so grandparents can hold their own 529 account for a grandchild without compromising financial aid eligibility.

What you can do today: Decide on a basic savings goal. Even if it isn’t sky-high, think about what you can afford and make a commitment to contribute that much each month. Bonus points? Set it up through autopay so you know you’ll do it, no matter what. And if grandparents are interested in helping you afford college, you can encourage them to start an account, too.

The Best Way to Save for College . . . If You’re Struggling Financially

If you have major debts that go to collection or if you have to file for bankruptcy, your child’s 529 education savings account should be largely protected, with a few exceptions.

Most states’ 529 savings plans are available with either no minimum contribution or a low minimum contribution (typically $25 or less). So even if money is tight, getting started on college savings is likely an attainable goal. Whether you’re putting away $50, $150 or $1,500, the most important thing is to figure out a plan that fits for your family.

My own lesson from this? Don’t get scared off by college “sticker shock” or headlines about rising tuition costs. Instead, concentrate on making consistent, affordable contributions and aim to cover a reasonable portion of college costs. Time is on my side, and every baby step brings me closer to a bright future for my child.

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