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Saving For College: Tips, Plans, and What You Need to Know

Nov 04, 2019 5 min George Mannes

Key Takeaways

  • Create a savings goal — it doesn't have to be the actual cost of college.
  • Get started with a 529 savings account and automate deposits.
  • Be realistic about your child's scholarship chances, both academic and athletic.


If you want to help fund the future college student (or students) in your family, it's good to start early and have a savings goal in mind.

One challenge, however, is estimating what that goal should be when the cost of college can vary wildly — not only among schools but also among the prices paid by different students at the same institution. Some may receive “merit" aid based on academic achievements, others might snag scholarship dollars for athletics and some qualify for “need-based" aid due to their family's financial resources.


On top of that, the price of college next year (let alone 18 years from now, if you're saving for a newborn) is anyone's guess. But you can make an educated guess.

Based on past increases, Mark Kantrowitz, publisher of student loan information website PrivateStudentLoans.guru Opens in new window, estimates that the price of higher education will triple by the time a baby born today is ready to matriculate. So, for example, a four-year public college degree that runs about $80,000 today would cost somewhere near $240,000 in 17 years.


How much should you save for college?

Now take a breath, the cost news isn't as bad as it sounds. For starters, part of that estimate would be due to inflation. Just as a dollar today doesn't buy you as much as it did in 2000, the $240,000 won't be as much of a financial burden in 2035 as it might be today.

Second, neither Kantrowitz nor others expect — or, as importantly, advise — you to target the full amount. “That will give you sticker shock," he says.

Instead, plan on financing college through a combination of sources: savings built up before a student heads off to college, family income that comes in during the years a student is in school and borrowing to be repaid by the student and/or parent after graduation.

Kantrowitz recommends aiming to have 33% of the total expected cost of college saved by the time your child is about to step on campus. Paula Bishop, a Seattle-based CPA and college financial aid advisor, recommends slightly less: for an in-state public school, 25% of the cost; for a private college, 30%.


What are 529 college savings plans?

Your best vehicle for reaching your goal is a 529 college savings plan.

Operated by individual states, each plan offers a menu of investments that grow tax-free. Better still, withdrawals are tax-free as long as the money is used for qualified educational expenses such as tuition, room and board — on and off campus — and books and fees. And if you live (and pay income tax) in the state that runs your 529 plan, you also might net a deduction on your state income taxes for the money you contribute to your account.

You're not tied down by geography, though: You can enroll in a 529 operated by any state, and use the proceeds to pay for college anywhere in the U.S. In fact, you're not even bound by the beneficiary's name on the account. If you have more than one child, you can transfer from one kid's account to help pay for another's education, tax-free. A real boon if, say, your formerly college-bound son decides he isn't cut out for the academic life, while his little sister wants to pursue STEM studies at a top private school.

The simplest option in a 529 plan is a fund with an age-based allocation. Like target-date funds for long-term goals like retirement, age-based funds invest more aggressively when your future student is young and gradually grows more conservative as they near college age. This takes advantage of time, enabling greater opportunity for growth, and more time to recover if markets falter. “As you accumulate more money," notes Kantrowitz, “you have less risk of losing it the day before you write the tuition check."

Investment offerings and fees vary by plan, so compare them and more at a site like savingforcollege.com Opens in new window.


How to start a college fund

Do you have a newborn? Kantrowitz suggests saving $250 a month if you're planning to send your child to an in-state public university, more if you think they'll be headed out of state — and up to twice that much if you have your sights set on the most elite schools. Whatever you contribute, you'll lose out on valuable chances for your money to compound if you wait too long to start. How much? Kantrowitz estimates that if you begin saving when your child enters high school, you'll have to set aside six times as much each month to establish the same sized college fund as you might see from starting early.

Developing that kind of discipline might seem like a tall order, so consider setting up an automatic transfer from your bank account to your college fund every month.


Be in it to win it

Experts say the most common mistake people make when planning for college is simply failing to save.

Parents may believe that their child will earn a free ride to college; in fact, less than 1% of students get enough grants and scholarships to cover all college costs, says Kantrowitz. Similarly, notes Paula Bishop, some parents think a strong student will warrant merit aid to attend a top-tier school — only to learn that the university offers need-based aid only. That's often the case at academically elite institutions: Given the quality of those schools' applicant pools, Bishop says, “they don't have to entice students to come to their school with money."

And even with schools that award merit aid, parents should be realistic about their child's standing relative to other applicants. “A student with a C average is never going to get as much money as a student at the top of the pool," says Mark Montgomery, president of Great College Advice, an independent college admissions consulting firm in Denver. “If your kid is a really good student, don't assume that the list price is your price. But if your kid is average to below average, you won't get a discount — the price you see is the price you'll pay."


Financial band-aid

Still, some parents don't save because they believe that the more they save, the less financial aid they'll receive. Yes, there is a “penalty" for saving, but it's not as big as you might think: Only 5.64% of the money in a 529 held by a child or custodial parent, along with parents' other assets, count against financial aid packages; by contrast, 20% of the child's assets — from bank accounts to savings bonds — can cut into aid.

What's more, understand that financial aid may come in the form of work-study (income from a student's on-campus job that goes toward college costs) and loans, not grants. That reality underscores two key benefits of saving for college, as soon, as often and as much as you can: Doing so could enable your child to go to a school you might otherwise be unable to afford. And it will minimize your kid's college debt. “It's cheaper to save than to borrow," says Kantrowitz. “When you save, you're earning the interest. When you borrow, you're paying the interest."


What you can do next

Regardless of your child's age, get started with a 529 college fund and setting up regular, automatic deposits. Please consult your tax and legal advisors regarding your particular circumstances.


George Mannes, a former senior editor at Money, has been writing about investing and personal finance since 1998.


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