Updated November 12, 2019

How Much to Save for College

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How much should you be saving for your child's college education? Which accounts offer the most benefit? And how soon should you start? These answers and more below.

How Much to Save for College

Rather than focus on putting away a set amount, start by saving what you can afford. Your savings typically will not cover all of your child's education. But it's a helpful head start.

Let's take a look at the average annual college costs reported by the College Board for the academic year 2018-2019:

Academic Year 2018-2019Tuition and Fees
Private Nonprofit Four-Year$35,830
Public Four-Year$10,230
Public Two-Year In-District$3,660

Academic Year 2018-2019Tuition, Fees, and Room and Board
Private Nonprofit Four-Year$48,510
Public Four-Year$21,370

Tuition and fees for a four-year program in a private college cost a whopping 64% more than a four-year program in a public college. And that's before room and board.

The money you put away now can go a long way toward the cost of college. So where should you start?

How much does the average family save for college?
The average family has $18,135 saved, according to a 2018 report by Sallie Mae, a student loan financing company. That's an 11% increase from 2016.

How Much to Save Each Month

Depending on when you start, you may be able to save as much as 50% of tuition and fees for a public four-year college. That works out to $20,460 ($10,230 x 4 x 50%), based on today's figures.

Consider a monthly plan to reach this total. If you begin when your child is 8 years old, you'll have 120 months (10 years, give or take) to save. That means you'll need to put away about $170 a month.

What's the best account for college savings? Read on for the answer.

Take advantage of unexpected savings opportunities, like a better-than-expected tax return or work bonus. These provide a chance to boost your child's college fund or play catch-up if you've fallen behind.

529 Tax-Advantaged Savings Plan

529 savings plans offer low-maintenance, tax-deferred growth through investments. Withdrawals are tax-free at both federal and state levels if used for qualified education expenses.

Most 529 plans can be opened with a small investment, as low as $15 per month or $45 quarterly with automatic investment payments. The initial contribution minimum averages $250 per plan.

Federal law allows single taxpayers to contribute up to $15,000 a year to a 529 plan. You can pay as much as you want throughout the year until the maximum contribution has been reached.

With 529 plans, it's best to start saving as early as possible. This allows even minimal investments significant time to grow. For example, $125.00 a month for 14 years will net $61,169 (assuming an annual 6% return on investment).

The money from 529 savings plans can only be used on expenses that are directly related to education. If the investment income is used for non-education related expenses, you will likely incur taxes and fees.

Read on to learn which expenses qualify under a 529 plan.

Tuition and 529 Qualified Expenses

The price of an education at eligible educational institution for both full-time and part-time students will qualify. This includes some eligible technical colleges and foreign school programs.

Here are other non-taxable expenses covered through a 529 plan:

  • Room and Board
    This qualifies when paid directly to the college or university if the student is attending half-time or more.

    Room and board is limited to the actual amount charged if the student is living in housing operated by the educational institution. If the student plans to live off campus, the amount cannot surpass that allowance. Any excess is not considered a qualified expense.

    If on-campus housing costs $9,000 for the school year, but your off-campus housing costs you $10,000, the excess amount ($1,000) is NOT considered a qualified education expense.

  • Mandatory Fees
    These include charges by the eligible educational institution in relation to tuition or room and board.

  • Books and Supplies
    These are non taxable when required for a course.

  • Technology Needs
    Non taxable items include computers and related equipment (printers and modems) and services (internet) if used during any of the years that the student is enrolled at an eligible education institution.

  • Computer Software
    These must be educational in nature and a requirement for a course.

Read on for a list of expenses that don't qualify under 529 plans.

Non-Qualifying Expenses

These college expenses are considered taxable by a 529 plan:

  • Insurance
    This is not included. You will pay a penalty if you use your 529 plan money for any type of insurance, even if it is paid to the school.

  • Sports Expenses or Monthly Health Club Dues
    Exceptions include requirements of a course.

  • Smartphones
    These are taxable unless a course requires you to purchase a designated phone.

  • Transportation and Travel Costs
    This is only considered qualified education expenses if you are required to travel as part of a course.

  • Repayment of Student Loans
    This will not qualify. Read our full guide to learn more about getting rid of student loans.

  • Room and Board
    Any excess of what the school housing would cost does not qualify.

You can start a 529 plan later in your child's life. Investments are automatically adjusted based on anticipated need dates. As your child nears college age, the funds are moved to less risky investments.

Keep reading to learn about other college savings options

Other College Savings Plans

Personal Savings

You can start a personal savings account at any point to save for your child's education. Some high-yield online savings accounts earn 2% interest or higher. But you'll make only .01%–.05% from accounts at most traditional brick-and-mortar banks.

You won't deal with penalties for early withdrawal, nor will you have to use the funds for qualified education expenses. But your rate of return with a personal savings plan will not even closely match the rising cost of education.

$100.00 per month in a personal savings account may grow to $16,994.99 over the course of 14 years. Compare that to a 529 plan's estimated 6% return rate of $48,935.

Qualifying U.S. Savings Bonds

U.S. savings bonds are federal tax-deferred and state tax-free if held until maturity. Maturity is 20 years after the bond is issued. Your return will be roughly 3.5% per year for the most common type of savings bond, type EE.

If you redeem the EE bond early, before the 20th year, your return will average just 0.1%, and you will incur a penalty of 3 month's interest if the bond is less than 5 years old.

If you purchase type EE bonds for college, you'll need to do so before your child is born to earn the maximum benefits at the 20-year mark. Otherwise, your child will need to defer college until the bond has matured.

There is a $10,000 maximum investment on U.S. savings bonds per owner, per type of bond.

UTMA/UGMA Custodial Accounts

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) allow adults to transfer assets to a minor. These enable minors to own protected securities in an account until they reach the age of majority in their state (usually 18 or 21 years of age).

Custodial accounts come with the freedom to invest in stock, bonds, and mutual funds. But they do not allow high-risk investments like stock options or borrowing money from a broker to purchase additional stock.

Assets are considered the property of the minor and a certain amount will go untaxed, while an equal amount of earnings are taxed at the child's tax rate instead of the parent's rate.

Funds can be withdrawn by a custodian for the benefit of the child if the expenses are for legitimate needs, such as pre-college educational or college expenses.

Custodial accounts are considered assets, which can reduce the availability of financial aid to students up to 20%. This can impact the child's eligibility for student loans.

Roth IRA

Roth IRAs are a viable college savings plan option. Your earnings can multiply significantly if you choose the best investment options. And the normal 10% penalty for early withdrawal of funds is waived when the money is spent on qualified education expenses.

Roth IRAs are not considered assets that lower the amount of financial aid a student can obtain. However, withdrawals are considered base income on the FAFSA application.

FAFSA, or Free Application for Federal Student Aid, helps the federal government determine how much financial aid a college or graduate student qualifies for.

Financial aid eligibility is determined by your Expected Family Contribution (EFC), your year in school, your enrollment status, and the cost of attendance of the school you will be attending. EFCs are based on a percentage of total discretionary income.

Once the application is made, your school will determine if you are eligible for gift aid, such as grants and scholarships, which will reduce your need for financial aid.

The maximum IRA investment per year in 2019 is $6,000 for people under the age of 50 ($7,000 for people over 50 years old). Opening a Roth IRA in your child's name allows them the same limit.

For single federal income tax filers, you can contribute the maximum amount per year if you earn less than $122,000. Married couples must earn less than $193,000 per year to contribute the maximum amount.

You can still invest in the IRA if you make more money than the maximum, but know that earnings decrease at that point, and will continue to do so until you reach the ineligible limits for single filers $137,000, and married filing jointly, or qualified widow(er) filers at $203,000 per year.


An ESA (Coverdell Education Savings Account) allows a custodial parent to save for your child's college with a broad range of investment options. Earnings are tax-free if withdrawals pay for qualified higher education expenses. You can also use earnings to pay for K-12 expenses.

ESA assets are counted up to 5.64% of the value, as parental assets when determining eligibility for federal student aid, whether a parent or dependent student owns the assets. If a grandparent owns the account, nothing has to be reported until the funds are withdrawn. But third party withdrawals are counted as student income on the following year's FAFSA.

Annual ESA contributions cannot exceed $2,000 per student, per calendar year. Opening a second account does not increase your ability to save with this plan. Earnings can be great with an ESA, and they may even equal those of a 529 plan with the same monetary investment. But $2,000 a year is an extremely low limit when considering the annual cost of college education.

Mutual Funds

Mutual funds don't offer tax advantages for funds that are used for college costs. Earnings are subject to annual income tax. When shares are sold, capital gains are taxed.

There is no limit on investment amounts and you aren't required to fit into any income-brackets.

Mutual funds owned by a parent will reduce a student's financial aid eligibility by up to 5.64% of the account value, and by 20% if owned by the student. If your intention is to supplement your child's education costs with both mutual funds and student loans, you may want to reconsider.

Student loans are another option for funding college. But funding college solely through student loans should be a last resort. The interest and impact of the debt on you and your child can be significant.

Keep reading as we talk about ways to lower college costs through gift aid and programs.

Ways to Pay Less for College

Grants and Scholarships
Considered gift aid, grants and scholarships can greatly reduce or entirely cover the cost of your child's education.

Some grants are offered automatically when a student applies for federal student aid through FAFSA. But you can research others given through federal, state, and school grants.

Many organizations offer scholarships for achievements, academic success, volunteer work, and involvement in extracurricular activities. If your child is in high school, request help from the guidance counselor. Otherwise, contact the student aid college at your child's prospective college or look online.

AP (Advanced Placement Courses)
Your child could reduce the cost of the first year of attendance in college by taking AP courses. Many colleges offer college credit in return for excellent academic scores, which can wipe out some freshman-level college courses.

Check with your high school counselor to see if any available AP courses could provide this benefit.

Community College Programs
Two-year community college tuition is much less expensive than most four-year universities. Universities typically accept up to 66 community college hours in transfer towards a degree.

Attending a community college first will also give you more time to save for 4-year enrollment in college.

Transfer students are increasingly common today. The University of California reports that nearly 30% of UC graduates attended a community college before transferring to UC.

Free or Reduced Cost Colleges
If you cannot save for college without lowering your family's quality of life, or if you can only save a small amount, reduced-cost colleges may be the answer.

Search online to learn more about your options. For starters, check out:

  • Brown University replaced all Brown-packaged financial aid awards in the 2018-2019 academic year with scholarship funds for all returning and incoming undergraduates.

  • Cornell University promises no need for parental contribution when a student's family income is less than $60,000, with total assets less than $100,000.

Keep reading to learn ways you or your family can earn and save money to boost college contributions.

More Tips to Help Pay for College

Even $100 a month can make a big impact when saving for your child's future education. Here are a couple ideas to get you started.

Earn Extra Cash
Consider a side gig. If you brought in an extra $25 to $50 dollars each week, you'd be surprised how far that money could go.

Here are some options to consider:

  • Drive for a rideshare app like Uber or Lyft
  • Pet sit in your home
  • Complete simple administrative tasks as a virtual assistant
  • Rent a room using Airbnb

Find Ways to Cut Back
Here are some ideas to save $100 a month simply by reducing common expenses:

  • Cut the (cable) cord
  • Prepare meals at home instead of dining out
  • Save on groceries by buying in bulk
  • Host game nights for nights out with friends

Make Saving a Family Affair
Offer your family members free perks for their money-saving efforts. Your kids will enjoy the game and contribute to their future education. Make sure you keep all of your family's funds in a savings account with a high APY, such as the Discover® Savings Account.

Bottom Line

Education costs are rising astronomically. But by starting early, you can properly plan for your child's future education. Take advantage of benefits offered by college savings plans, especially tax-advantaged options like a 529 plan.

Remember, there are ways to reduce the cost of college. To take full advantage, begin researching the options as early as possible.

Write to Mary Humphrey at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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