How to Save for College

By Tara Siegel Bernard

Illustrations by Martin Nicolausson; Graphics by Julian H. Lange

The estimated cost of putting a newborn through public college 18 years from now is nearly equivalent to buying a median-priced home today for all cash. Saving that much, especially for more than one child, is impossible for most families. Nobody wants their children to start their adult lives saddled with a crippling amount of student debt. But numbers like those can have a perverse effect, paralyzing parents into doing nothing at all. After all, there’s no class in, ahem, college, to prepare us. We aren’t told how to begin and it’s often hard to find any wiggle room in the budget, particularly when you’re already paying a mortgage (or rent), child care, health insurance — and maybe even a student loan of your own. So where should you begin? Right here.ADVERTISEMENT

Who Should Save?

If you can afford to save something, you should — every little bit can help.  

Retirement vs. College

Don’t think about saving for your child’s future college education if you currently have a pile of high-interest credit-card debt or don’t have any money set aside in an emergency fund. Deal with that first.  

Everyone else who can afford to save something should. 

The more debatable part of this question is how prioritize saving for your own retirement versus the kiddo’s college fund. There are two common ways of thinking about this that tips the scales toward retirement: You can borrow for college, but you can’t borrow for retirement (though homeowners technically can, with a reverse mortgage). And there’s an often-repeated maxim that saving for retirement before college is akin to the advice given on an airplane: put your oxygen mask on first, before your child. You don’t want to be a burden to your child later. And if you’re well-positioned after they graduate, you can always help with paying your children’s loans. 

Find the Balance

Ultimately, you’ll need to consider how to balance the two goals of retirement and college saving. Financial planners suggest testing varying rates of savings — for retirement and college — to see the impact of dialing one up and dialing down another. You can play around with online retirement and college savings calculators to get a general sense, or pay a professional financial planner for their time for a more precise outlook.

Note: If you believe saving for college will hurt your eligibility for financial aid, you can safely cast those ideas aside. The truth is, when the federal government determines what you are expected to contribute, your income matters far more than your savings. (And retirement accounts don’t count toward that equation at all, as long as you are not withdrawing money from them). 

In fact, if you are looking to tip the financial aid scales in your favor, ask the fertility gods to grant you twins or children close enough in age that they’ll attend college at the same time — that significantly boosts your chances at getting need-based aid, or the types of grants and money that you don’t have to pay back.

How Much Should You Be Saving

It’s important to understand your goals, and your current situation, as you plan for the future. 

Develop a Philosophy

There are several philosophies on what you might save, but then there’s the hard reality of what you can afford to. There is also no easy way to know exactly what you will have to pay out of pocket, even if your offspring are aces at 2nd grade math.

How much you save may also be influenced by your values. “Do you want to pay 100 percent of the cost of any school?,” said David Ressner, a financial adviser in St. Louis, Mo. “An amount equal to the cost of their in-state flagship university? Or do you want your child to have skin in the game?”

Be Practical

Once you’ve thought that through, there are several practical ways to put together a savings plan. Mark Kantrowitz, a well-known expert on all-things college finance, advocates the following strategy: 

  • Save one-third of the costs of a four-year public college in your home state over your child’s first 18 years. 
  • Attempt to pay a third out of your income while they’re attending college.
  • Finance the remainder (with federal loans). 

Other experts suggest variations of that theme, like saving a quarter of the cost, paying a quarter and borrowing the rest split among family members. 

Regardless of what you decide to save, there are big benefits when you save early on: If you start when your child is a newborn, roughly one-third of the savings will be generated from the earnings on your investments, according to Mr. Kantrowitz. If you wait until high school, less than 10 percent will come from earnings. 

“If you procrastinate, you will have to really save a lot more than you otherwise would,” he added. But it’s never too late. “Even if you’re starting very late in the game, the year before they enroll, by saving that money you will be reducing the debt.”

Crunching the Numbers

The total cost of a four-year public college starting roughly 18 years from now will be about $183,837, according to calculations based on the College Board’s data. That assumes 2018-19 tuition, fees, room and board rise around 4 percent annually as they have for the past decade; they rose at a faster clip before that. 

Naturally, the costs of a private school, or an out-of-state public school are far more. But keep in mind that most people do not pay the full sticker price — and you may qualify for more financial aid at a higher-cost private college than an in-state public one.

The chart below shows the breakdown of where your money will go. Note: These figures are not adjusted for inflation because they represent amounts that would need to be saved. If we did adjust for inflation, the cost of public college in 2036 would be $33,920, while the private college would cost $73,045.

Data provided by The College Board.

The following chart shows how the costs for college break down, assuming you are attending a four-year institution and living on campus.

Data provided by The College Board.

And this chart shows how the cost of a four-year college has increased since 1988. 

Data provided by The College Board.

Here is the amount you need to save each month to pay some or all of those costs at an in-state, four-year public university, assuming a 6 percent annual return on your investments and that your child enrolls at age 18.

Data provided by Mark Kantrowitz of

If you can’t afford to start with a formal plan (taking a percentage or set amount from every paycheck), you might simply begin by directing all found money — like birthday or holiday gifts — to seed a college savings account.

Where Should You Save?

You decided you want to start saving. Now you need to figure out where to put your money. 

The Simple Answer

A 529 savings plan is often the right choice.

There are several different accounts you can save in, but most financial experts often recommend a 529 savings plan because of its attractive tax breaks. And the mere act of setting one up may encourage you to contribute. 

How 529 Plans Work

States run the 529 plans. You set up an account and choose how to invest the money. Contributions are made with money that has already been taxed. But the money grows tax-free and is also withdrawn free of income and capital gains taxes as long as it is used to pay for qualified higher education expenses (as of 2018, up to $10,000 can be withdrawn annually for K to 12 tuition as well, but we’re focusing here on higher ed). As an added bonus, 34 states, plus the District of Columbia, offer a state tax benefit on contributions to the plans. 

For example, in New York (Figures calculated by Vanguard.)

  • New York State provides an annual deduction of up to $5,000 (or $10,000 for joint filers) for amounts contributed by the account owner (or their spouse) to one or more 529 savings accounts.
  • Consider a married couple with income of $150,000 who contribute $125 a month. That would produce a state tax deduction of $1,500, or savings of about $100 annually; over 18 years, the New York state tax savings can total more than $3,000, assuming the annual tax savings are invested and earn 6 percent annually.

In Ohio: 

  • Ohio provides a state income tax deduction of up to $4,000 for taxpayers, regardless of their filing status, for each beneficiary each year. (If you contribute more than that amount, the excess contribution can be deducted the following year.)
  • Consider a married couple with $75,000 in income who contributes $100 a month. They would receive an annual state tax deduction of $1,200, saving them about $40 annually. Over 18 years, the tax savings could grow to $1,300, assuming the money is invested and earns 6 percent annually.

The various 529 plans can vary widely in their costs and quality, but they all have the same underlying benefits:


Anyone can set up a plan or contribute, regardless of income. 

Contributions are considered gifts and can generally be up to the gift tax exclusion ($15,000 in 2018). 

A minimal effect on financial aid: Only up to 5.64 percent of the value of a parent-owned 529 will count toward the family’s expected contribution as calculated through Free Application for Federal Student Aid, or Fafsa. Have $40,000 saved? Your aid will only be dinged by up to $2,256. 

If a child gets a scholarship or doesn’t need the money for another reason, the account beneficiary can be easily changed to another family member — a parent, siblings, first cousins, even a grandchild. The money can also be used for grad school.

Qualified expenses also include eligible trade and vocational schools, school books and computers. 

The money can sit indefinitely; if it’s not needed, the money doesn’t have to be withdrawn by a certain age. 

Some states offer seed money after a first child is born or adopted, while others may provide matching contributions for low and moderate income families.

Wealthy individuals can contribute as much as $75,000 in a year (or up to $150,000 for married couples) if they treat the contribution as a gift made over a five-year period. (You can give more, as long as you’re willing to pay gift taxes or use part of your lifetime gift tax exclusion. There are no annual contribution limits on 529s, though aggregate limits range from $235,000 to $520,000, depending on the state, experts said.)


Limited flexibility. Withdrawing money for anything other than a qualifying education expense means you’ll owe both income taxes and a 10 percent penalty on earnings, though contributions are not affected. States also recapture any state income tax benefits on money not used for eligible expenses. If a child gets a scholarship, you can withdraw up to the amount of the award penalty-free (but income tax will be owed on earnings).

Choosing a 529

Buy through a broker or direct? You probably want to avoid the 529 plans sold through a broker, which generally have higher annual costs and whose investments may include sales charges of anywhere from 1 percent to 5.75 percent of your contributions, according to, a resource with a plethora of information on the plans. Those costs can add up over time, leaving you with less to pay for your child’s education. Instead, the plans sold directly to consumers tend to offer less expensive investing options, including index funds.

If you want some hand-holding, the cleanest way to go about this is to pay a financial adviser for their time to help you select a plan and its investments. You can search for planners who specialize in college planning — and most importantly, who promise to put your interests ahead of their own — through organizations like the National Association of Financial PlannersXY Planning Network or Garrett Planning Network. Betterment, the online money management service, offers a college-planning package for $199.

If you’re prone to panic when the markets plummet, it’s possible that a more reasonably-priced broker-plan could make sense, as long as you shop around and consider the long-term costs. 

In state or out of state? Since many states offer state tax deductions or credits, it’s often wise to start by looking at the 529 plans in your home state as a first step. 

But there are situations where out-of-state 529 plans may make sense, explained Leo Acheson, an associate director at Morningstar Research Services, which rates 529 plans, including:

  • If you live in a state with no state income tax
  • If your state allows you to take a tax deduction even if you invest in another state’s plan
  • If you live in a state that doesn’t permit 529 state tax deductions 

Or, maybe your in-state options are just really subpar.

There’s a lot more to consider beyond the tax breaks, however. The quality and choices within the plans are also really important, including the breadth of investment options, their costs and performance. Even among direct-sold plans, the costs can vary. Louisiana, for example, which has the cheapest plan, is open only to residents: It costs $152, on average, over 10-years on a hypothetical $10,000 investment, according to a fee study by The next four least expensive plans range from $166 to $221. That’s cheap.

In addition to Morningstar, has comprehensive rating tools that will help you evaluate the plans. 

Setting Up a 529

It typically makes sense for parents to set up a 529 account in their own names, with their dependent child as a beneficiary — that has the least impact on financial aid eligibility. (Divorced parents should set up the account in the custodial parent’s name to get the most favorable financial aid treatment.)

Beware of well-meaning grandparents: If they set up a 529 in their own names, for example, withdrawals from that account are counted as untaxed income to the student on a subsequent year’s financial aid forms. That can reduce need-based financial aid eligibility by as much as 50 percent of the amount withdrawn. There are workarounds, however, so be sure to study them before making any withdrawals, according to Mr. Kantrowitz, who is also publisher and vice president of research at

Evaluating Investments

Most 529 savings plans allow you to set up automatic, recurring contributions from, say, your checking account. 

To make things simple, 529 plans typically serve up ready-made portfolios, something they call age-based options. In other words, they provide a complete portfolio of stock and bonds funds that will automatically become more conservative as you approach the date your child’s first tuition bill is due. 

You choose the option that is closest to your child’s age and that most closely matches your tolerance for risk. And be sure to study how the investment mix changes over time — it should be gradual, and you don’t want to have too much risk just before you’ll need the money. Plan options — and age-based options — can vary greatly from plan to plan. 

The age-based portfolios in New York’s 529 plan, for example, come in three flavors: conservative, moderate and aggressive. A 4-year-old in the aggressive portfolio will start with 100 percent in stocks, whereas the conservative portfolio will have 62.5 percent in stocks. Once you find an option that fits your needs and stomach for risk, set it — and forget it. 

As you approach your child’s high school years, however, be sure you are comfortable with the amount of money allocated to stocks and other risky holdings. After (hopefully) years of saving and investing, you don’t want to keep the bulk of your savings in aggressive investments like stocks because the account may not have enough time recover should something like the market dive of 2008-09 happen again. 

If you aren’t sure, hire a financial planner (who promises to act as a fiduciary) for some one-time advice. You are allowed to change your 529 allocations only twice a year.  

What Are Your Other Account Options?

There are other ways to save for college, but may require more research to make sure they are the right fit. 

Prepaid 529 Plans

These follow many of the same broad rules as 529 savings accounts. But the prepaid plans generally let you prepay for blocks of tuition at a state university in advance, locking in today’s rates. 

Why should you consider it?A potentially meaningful discount. “The bottom line for the 529 investor choosing between prepaid and savings plans is that if an investor thinks tuition inflation will remain high – or at least unpredictable for the risk averse – and if the investor is relatively sure the beneficiary will choose an in-state higher education option, then the prepaid route is a reasonable bet for future college funding needs,” said Andrea Feirstein, a consultant to 529 plans. 

There are 11 state-sponsored plans open to new investors, she added, where you can lock in tuition at in-state public colleges. But you generally need to be a resident and the student needs to be accepted and attend an in-state school. Massachusetts’ plan is an exception: you don’t need to be a resident to enroll and benefits can be used at public or private schools there. 

There is also one institution-sponsored prepaid plan, called the Private College 529 plan, which has nearly 300 member schools, which include some big brand names including Princeton and Stanford.

Before you choose a prepaid option, you’ll need to read a lot of fine print. First figure out what it is you’re buying — most are “contract” plans, where you can prepay for a certain number of semesters, but others work differently. But you should also figure out: if there are limits on how and when the money is used; when you must enroll; what the refund policies are; and whether your savings are backed by the full faith and credit of the state (or if there is another guarantee.)


They receive the same tax treatment and benefits of 529 savings plans, including the same effects on financial aid and portability to family members.


These plans are more difficult to understand than 529 savings plans. 

The funds can typically only cover tuition and fees, not room and board. 

If the student decides to go out-of-state or attend a private school, or isn’t accepted to an in-state school to their liking, the state-run plans will generally pay the average of in-state public college tuition — and that may not be enough. The payout rates vary by plan.

There may also be limits on when the money must be used (for example, it might have to be used within 10 years of high school graduation).

And if the state plan is short on money when your child enrolls, who will back the shortfall? You need to be comfortable with the answer to that question. Guarantees are limited in some plans.

Coverdell Education savings account

These custodial accounts allow you to contribute up to $2,000 a year for children 18 or younger, which will grow tax-free and can also be withdrawn free of tax. Money can be used only for qualified education expenses for elementary school, high school and higher education. But now that the 529 can also be used for elementary and high school tuition, Coverdells have lost some of their allure.


Potentially more — and possibly cheaper — investment options than 529s.

Accounts can be transferred to a relative of the beneficiary (but they must be under 30).

More flexibility in what you can spend the money on during elementary and high school compared with 529s, including uniforms, tutoring or extended day fees.

The effects on financial aid are the same as the 529. 


Low contribution limits; a total of $2,000 per child (not per account).

Income limits: if your modified adjusted gross income is above $95,000 ($190,00 for joint filers), the amount you can contribute will be reduced, and once you earn more than $110,000 (or $220,000 for joint filers), you are no longer eligible to contribute.

No state tax break compared with a 529.

Money must be used before the beneficiary’s 30th birthday, unless the individual has special needs; otherwise its subject to penalties.

Roth I.R.A.

Some financial planners suggest that parents stash at least some college savings in their own Roth I.R.A., where contributions both grow and are withdrawn tax-free, largely because it provides more flexibility (think of it as diversifying the types of accounts you’re saving in). If you don’t need the money for your child, it’s there for you. In fact, if you’re not on track to meet your retirement goals, some experts suggested maxing out a Roth I.R.A. before contributing to a 529.

Here are the details about a Roth I.R.A: 

  • Individuals can contribute up to $6,000 in 2019 or $7,000 if you’re 50 or over (married couples must earn less than $193,000 to make the full contribution). 
  • Contributions can be withdrawn before age 59 and a half for any reason (and earnings can be taken out penalty-free but not tax-free if the money is used for higher education for you, your spouse, children or grandchildren).

But the money must be used strategically, particularly if you qualify for financial aid: the fact that the Roth account exists won’t hurt your eligibility for aid, but it will hurt when you withdraw the money because it will boost your income — and income counts far more than savings in those calculations. If that’s a concern, don’t use that money until after Jan. 1 of the student’s sophomore year of college, assuming they will graduate in four years (and you’ll need to use other money, like 529 funds, for the prior period). “Because this is complicated, I usually say wait until the child graduates, then take the tax-free Roth contributions to pay down student debt,” Mr. Kantrowitz said. 

And naturally, if the Roth money is central to your financial stability in retirement, don’t spend it on college.

Brokerage Accounts

Standard brokerage accounts may make sense for some families. You’ll give up the tax-deferred savings that come with 529 accounts, but the money can be used for whatever you want, whenever you want.  

The account is counted as the parent’s asset, which means up to 5.64 percent of its value will be considered in financial aid calculations. And, like the Roth, all money withdrawn will be treated as income, impacting financial aid eligibility.  

Custodial Accounts

You may have also heard about the custodial accounts known as “UGMA” or UTMA” accounts, the acronyms for the laws – Uniform Gifts to Minors Act and Uniform Transfers to Minors Act — that established them. They aren’t ideal for college savings for a variety of reasons, nor do they provide any special tax benefits.

“You give up a lot of control and flexibility,” said Matt Becker, a certified financial planner in Florida. “You cannot change the beneficiary, which means that any money you contribute has to be used for that specific child, and your child gains complete control over the money once he or she reaches 18 or 21 and can use it for whatever they like. Money within a UGMA or UTMA also counts as your child’s asset for financial aid purposes, which makes it harder to qualify.”ADVERTISEMENT

How to Win at Saving for College

Once you’ve started, set yourself up for success with these tips and tricks. 

Getting started saving for college is the hard part. Now that you’ve gotten over the anxiety of the college sticker price, waded through your options, set up an account (or two) and put a little stash aside, you are already ahead of the game. Want to maximize your chances of saving enough for your child’s higher education? These five tips will help: 

  1. Automate. Automating your savings is probably the easiest and surest way to guarantee success. Set up your checking account to automatically transfer a manageable sum into your college accounts — it’ll help these accounts grow without any extra thought.
  2. Invite others to help. Let family members know that small contributions to 529s would make great birthday or holiday gifts. Most 529 plans have ways to accept gifts; plans operated by Ascensus have a neat feature called Ugift, a free service that lets account owners share a code with gift-givers, making it easy to send contributions. Meanwhile, some retail stores like Target sell 529 gift cards, though extra fees apply.
  3. Spend money, earn 529 cash. Upromise is a loyalty program where members earn cash back for shopping at retailers through its online portal, using its Upromise Mastercard, as well as dining at specific restaurants when you link a debit or credit card to your Upromise account. All money earned is shuttled into your 529 account. Fidelity’s 2 percent cash back credit card is particularly attractive for people with plans in the four states where it manages 529 plans — Massachusetts, Arizona, New Hampshire and Delaware — because you earn 2 percent back on all purchases, which is funneled back into your 529 account.  Though it may require a bit more discipline, there’s also nothing stopping you from directing some or all of your cash-back  — from any credit cards’ rewards — into the kiddos’ plans as a way to top them off at the end of the year.
  4. Employer help. A minuscule number of employers — 1 percent, according to the Society for Human Resource Management — will contribute or match your 529 contributions. So be sure to check if you’re one of the lucky ones.
  5. Check progress, but not too often. If you’ve already begun saving but think you haven’t made enough progress, there is a rule of thumb — calculated by Mr. Kantrowitz — to help determine whether you’re on track to save at least a third of the cost: For an in-state, public four-year college, multiply the child’s age by $3,000; for an out-of-state, public four-year school, $5,000; and $7,000 for a private four-year college. 

About the Author

Tara Siegel Bernard