What is saving for college? It’s the practice of setting aside money over time to pay for a child’s higher education. For parents, this means planning years, sometimes decades, ahead to cover tuition, room and board, books, and other expenses. The cost of college continues to rise each year. According to the Education Data Initiative, the average cost of attending a four-year public university now exceeds $26,000 per year for in-state students. Private institutions often cost more than double that amount. Starting early gives families more time to grow their savings and reduces the need for student loans. This guide explains why saving for college matters, which account types work best, how much families should aim to save, and practical strategies to begin today.
Key Takeaways
- Saving for college means setting aside money early to cover tuition, room and board, books, and other higher education expenses.
- Starting early allows compound interest to work in your favor—a $5,000 investment at birth could grow to over $15,000 by age 18.
- 529 plans offer tax-free growth, high contribution limits, and the flexibility to roll unused funds into a Roth IRA starting in 2024.
- Financial experts recommend saving about one-third of projected college costs, with the rest coming from income, aid, scholarships, and loans.
- Automating monthly contributions—even as little as $25 per week—builds significant savings over time without the temptation to skip.
- Redirect gifts, tax refunds, and small expense cuts toward your college fund to accelerate savings without major lifestyle changes.
Why Saving for College Matters
Saving for college matters because higher education is expensive, and getting more so. Tuition has increased by roughly 3-4% annually over the past decade. Without savings, students often rely on federal loans, private loans, or both. The average student loan debt for a bachelor’s degree graduate now exceeds $30,000.
Starting a college savings plan early offers several advantages. First, compound interest works in the saver’s favor. Money deposited when a child is young has more time to grow. A $5,000 investment at birth could grow to over $15,000 by age 18, assuming a 6% annual return.
Second, saving for college reduces financial stress for the entire family. Parents who save consistently don’t have to scramble for funds when acceptance letters arrive. Students can focus on academics rather than working excessive hours to pay bills.
Third, families with dedicated savings have more options. They can consider schools based on fit rather than just price. They can negotiate financial aid packages from a stronger position. And they can avoid the trap of high-interest private loans that follow graduates for years.
Saving for college also teaches children about money management. When kids see their parents plan and save, they learn the value of delayed gratification and financial responsibility.
Types of College Savings Accounts
Parents have several options for saving for college. The two most popular account types are 529 plans and Coverdell Education Savings Accounts (ESAs). Each has distinct benefits and limitations.
529 Plans
529 plans are state-sponsored investment accounts designed specifically for education expenses. They offer significant tax advantages. Contributions grow tax-free, and withdrawals remain tax-free when used for qualified education costs like tuition, books, and room and board.
Most states offer their own 529 plans, and many provide state income tax deductions for contributions. Parents can choose any state’s plan, regardless of where they live. Some plans have low minimum contribution requirements, as little as $25 per month.
529 plans have high contribution limits, often exceeding $300,000 over the life of the account. The account owner (usually a parent or grandparent) maintains control of the funds. If one child doesn’t need the money, the beneficiary can be changed to another family member.
One recent change makes 529 plans even more flexible. Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to certain limits. This removes one of the biggest concerns parents had about over-saving.
Coverdell Education Savings Accounts
Coverdell ESAs also offer tax-free growth and tax-free withdrawals for education expenses. Unlike 529 plans, Coverdell accounts can pay for K-12 expenses plus to college costs.
But, Coverdell accounts have stricter limits. Annual contributions cannot exceed $2,000 per beneficiary. Income limits apply, single filers earning over $110,000 and joint filers earning over $220,000 cannot contribute directly.
Funds in a Coverdell ESA must be used by age 30, or they become taxable. Even though these restrictions, Coverdell accounts work well for families who want more investment flexibility or need to cover private elementary or high school expenses.
How Much Should You Save for College
The amount families should save for college depends on several factors: the type of institution, current savings, and financial aid expectations.
As a baseline, consider these 2024-2025 average annual costs:
- Public in-state university: $26,000
- Public out-of-state university: $43,000
- Private nonprofit university: $58,000
For a four-year degree, multiply these figures by four. A public in-state education costs roughly $104,000 total. A private school costs over $230,000.
Most financial experts suggest aiming to cover about one-third of projected costs through savings. The remaining two-thirds typically come from current income, financial aid, scholarships, and reasonable borrowing.
Using the one-third rule, a family targeting a public in-state school should aim to save approximately $35,000 by the time their child turns 18. That breaks down to about $160 per month if they start at birth, assuming a 6% average return.
Families can use online calculators to estimate their specific target. These tools factor in inflation, expected returns, and the child’s age. The College Savings Plans Network and many 529 plan providers offer free calculators.
Remember: something is always better than nothing. Even $50 per month adds up over 18 years. Parents shouldn’t feel discouraged if they can’t hit ideal targets right away.
Strategies to Start Saving Today
Starting a college savings plan doesn’t require a large lump sum. Small, consistent contributions build significant wealth over time. Here are practical strategies to begin saving for college today.
Automate contributions. Set up automatic monthly transfers from a checking account to a 529 plan or Coverdell ESA. Automation removes the temptation to skip months. Even $25 weekly adds up to $1,300 per year.
Use gifts strategically. Ask grandparents and relatives to contribute to the child’s education fund instead of buying toys. Many 529 plans offer gift contribution links that make this easy. Birthday and holiday gifts can become meaningful investments in a child’s future.
Redirect windfalls. Tax refunds, work bonuses, and inheritance money can jumpstart a college fund. A one-time deposit of $2,000 in a newborn’s 529 plan could grow to over $6,000 by college age.
Cut one small expense. Canceling a $15 streaming service frees up $180 per year for college savings. Small sacrifices compound into substantial savings over time.
Start with your state’s 529 plan. Research whether your state offers tax deductions for contributions. If so, start there. The tax savings effectively increase your contribution.
Increase contributions gradually. Commit to raising your monthly contribution by $10 or $25 each year. This gradual approach fits naturally into rising incomes without creating financial strain.
Involve the child. As children get older, encourage them to contribute a portion of allowance, birthday money, or part-time earnings. This builds ownership and appreciation for education.
