College Savings: The Basics of Saving for College

Got kids? If so, you're probably hoping to send them to college. And you know it won't be cheap. College costs are rising faster than inflation, and have been for decades.

But that doesn't mean you can't afford a good education for your kids, even if you have a modest salary or other substantial expenses. I'm not going to pretend college isn't expensive: Full scholarships are less common in real life than they are in the movies. You'll probably have to spend a pretty penny for the privilege of attending your son or daughter's college graduation.

The value of a college education
Even with the skyrocketing costs, a college education is still a good deal. Post-college educations tend to garner graduates salaries that are 60 percent higher than those of high school graduates. Over a lifetime, college graduates typically earn $1 million more than those without college educations.

That's a big increase in lifetime wealth!

College graduates typically also have more flexibility in the careers they choose, which comes with side benefits like more job satisfaction. Not only does a college degree make you richer, it can give you a better shot at happiness, too.

Note: This doesn't mean you can't be successful without a college degree, or that people with a college degree are guaranteed a bright future. Not at all. It just means that those with college degrees are more likely to earn more than those without.

 

Those are some strong incentives to help our kids get a great college education. But how can you pay for it? By saving slowly and steadily, of course.

Save early and often
Like any savings goal, the most important part of saving for college is simply to start doing it, and commit to it regularly. The younger your kids are when you start building their educational nest eggs, the more funds you'll have available to help them achieve their dreams.

There are plenty of tricks to get the most bang out of your college savings bucks. Not all college savings accounts are cut from the same cloth, and it's worth taking a little time to look into your options before you invest.

First, be realistic about what you can contribute. Don't try to save your child's entire college costs before her 18th birthday. Save what you can. Aim for saving one third to one half of your child's expected education costs. The rest you can pay for when your child attends school, through your current income, grants and loans, and your child's own contributions.

Of course, saving more money is always better. But saving between a third and a half of the total cost should be enough to get you through.

Put yourself first
Also be sure to bolster your own assets. Contribute as much as you can to your home equity and retirement savings.

Most experts agree that you should be fully funding your retirement and paying down your mortgage before you start saving for college. Provide for your kids by guaranteeing a solid financial future for yourself first. College students generally have ready access to low-interest loans. This isn't true for retirees. If you don't want to become a financial burden to your grown kids after you retire, you'll attend to your own future before saving for theirs. Trent at the Simple Dollar does a great job of breaking down the reasons for valuing retirement savings over college savings.

This strategy isn't just good financial sense for you. Home equity and retirement funds are special classes of protected savings. Most schools don't include these assets at all in their financial aid calculations. A few elite private schools do, but they won't expect you to dip into them as heavily as your cash savings accounts.

The 411 on 529s
Speaking of savings accounts, when you're ready to start a college fund, you'll want to choose one carefully. Keep the savings in your own name. Parental assets are weighted less heavily than student assets by financial aid offices. That means your savings impact the aid your child qualifies for less than the same savings in your child's name.

A state-run 529 plan is a good bet. These tax-sheltered funds allow deposits to grow tax-free, and all withdrawals spent on educational expenses are tax-free as well. A word of warning: If you withdraw the money for something else, you'll pay a hefty fee, akin to an early withdrawal from a retirement account.

Not all 529 plans are the same. Administrative costs for these plans range from 0.2% to over 2%. That's a huge range; you'll want to choose carefully. Additionally, some plans adjust their mix of investments as your child ages, from growth-oriented ones to more conservative ones that protect your nest egg.

Every state offers a 529 plan, but you're not limited to the one your state runs. Nearly all states allow out-of-state investors. Your state may offer special incentives like matching grants or discounts at state schools, but given the range of expenses and options in these plans, it's worth your while to look around

Final thoughts
If you're counting on financial aid grants and subsidized loans to make up a critical part of paying for college, you'll want to maximize your financial aid qualifications. That means putting money into your mortgage, paying off debt, fully funding your retirement, and then saving for college.

Conveniently, these are all good strategies for general personal finance. With the exception of the restrictions on a 529 plan, they'll stand you in good stead whether your kid gets into Harvard or decides to go find himself on a walkabout in the Australian outback.

If beyond those basics, you can save a substantial nest egg for your son or daughter's education, you'll be in great shape when the time comes. A financial advisor can help you determine, based on your child's age and your income, whether the tax-sheltered aspect of a 529 plan makes it worth the restrictions and risks.

Don't let the intricacies of college savings be a deterrent to getting started. You child's education will be a major life expense for your family. The sooner you begin preparing for it, the better of you and your kids will be.

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Meghan
Meghan
9 years ago

This is a really simplistic view of going to college. The 1$ million increased earnings figure has be discredited for a long time. I would also like to point out the unethical practices of student loans, and that Obama’s loan reform does NOT help students. Obama’s “reform” cut the middle man out, but still offers no consumer protections to the students, and the government benefits even more from higher tuition costs since student loans are never discharged in bankruptcy courts. Collegescholarships.org puts it best with their graphical representation: http://www.collegescholarships.org/research/student-loans/ Also, watch PBS’s College Inc. for further insight. Yes I have… Read more »

Nicole
Nicole
9 years ago

We’re hoping to save our child’s entire expenses for undergrad at a private school (he could go to our flagship public for free, but I teach some of their best graduates, and they were poorly educated, so that is out unless we move states). We’ve got it on an automatic monthly deduction to the Utah 529. I checked the other day and we’ve managed to magically save up 18K since he was born without even noticing. One important thing on the 529s… we’ve gained some over the same time that the 529 we fund for a cousin has lost. The… Read more »

Adam Hussey
Adam Hussey
9 years ago

Is there a financial comparison to people with degrees versus people with a trade? It seems to me that people with a trade make much more and pay less for their education. If you are making a broad comparison and have people with a master’s or a phd in on the equation, it can change the averagre’s drasticaly. Likewise, if you include people with simply a highschool degree in with people who have a trade.

HollyP
HollyP
9 years ago

One very important area not mentioned in this post: if you have more than one child, fund the oldest child’s account first.

This was the advice of the flat-fee financial planner MrP and I work with. If that oldest child does not use all the money, you can roll it to the next child, and so on. If you fund plans for each child equally but the youngest does not go to college, then you end up taking a hit on withdrawals of the unused funds.

Everyday Tips
Everyday Tips
9 years ago

I agree with Holly – don’t just evenly save for your kids for college. We still contribute to all 3, but I save more for child 1 than the other two. That doesn’t mean the other two are out of luck, but I definitely do not want money left over when my 3rd child goes to school. (I am about 99.99 percent sure that wouldn’t happen anyway, but just in case…) It is sad because academic scholarships are incredibly hard to come by. My daughter is striving to get a ‘full ride’ and I don’t want to break her heart… Read more »

Janette
Janette
9 years ago

I am wondering if it might be better to save more in your YOUNGEST child’s account. If you can use the money for any of them by rolling it- could you benefit from having the oldest with less money looking better for financial aide?
I don’t know anything about 529’s except I contribute to my grandson’s yearly. It is just a thought.

Maureen
Maureen
9 years ago

Students should be encouraged to attend school close to home (if possible)so they can continue to live at home while they attend classes. This will make a huge difference in the cost of their education. I know that living away from home can be a wonderful experience, but facing huge student loan debt isn’t so wonderful! I would rather my kids be free from debt upon graduation than to have to then be ‘boomerang kids’ coming back home to live because they are struggling financially.

Nicole
Nicole
9 years ago

I do not want to get into any sort of political debate because that would stress me out right now, but I’d like to go on the record saying that I strongly disagree with #1 Meghan. Student loan reforms will help students. Are they perfect? No. But very little in real life is perfect. They’re better than what was in place before. Incremental change is better than none.

Emily
Emily
9 years ago

So we’re maxing out on 401k and Roth IRA contributions right now and putting an extra $70/month towards our mortgage. We are saving absolutely nothing for our 3 year old’s college expenses because money is tight. So by the article above, it sounds like we are on the right track regarding future college expenses. It doesn’t always feel like that though.

Jenessa
Jenessa
9 years ago

Merit based scholarships are not as uncommon as some people seem to think (at least they were not five years ago when I graduated from university). My parents paid a couple thousand dollars for my first year of school, but my next four years I got enough scholarships that I was paid to go to school. My sister and several of my friends were all in the same situation. None of us had a full ride from one scholarship, but lots of smaller ones that added up and we all attended a state university. It is important to look hard… Read more »

Joe
Joe
9 years ago

SavingForCollege.com is a good resource if you are looking for more info. Once a year I use the calculator on the site to see how I am doing. It’s worth keeping an eye on, as costs go up rather rapidly, even at state schools, as budgets are tight.

One additional thing I found when I compared 529 plans. My state plan did not have the lowest expenses, but the tax deduction more than makes up for the difference.

KMJ
KMJ
9 years ago

I plan on telling my children that they are on their own for college and any graduate school that they want to attend. I want them to take the responsibility for their own decisions and be OK with receiving no help whatsoever. I will also tell them that if they try to return home after 18 for more than 3 months, I will charge them rent. In reality, once they get to school, I will help them to the extent that I can and deem reasonable, but I don’t want that expectation of help ingrained. I’m not kidding about charging… Read more »

khadijah
khadijah
8 years ago
Reply to  KMJ

That’s harsh. Not to asian standards, though. This was what my mom told me and my sisters. She said she won’t have money to support all of us through college, she prayed we study hard and get by with scholarships, etc. If not she hoped that we work and become useful people. For my mom and her siblings, they had to sacrifice education to start working to support their parents and the rest of the family. In the end I think my sisters and I did pretty good. Four out of five of us got free rides, three in engineering… Read more »

Steffie Erikosn
Steffie Erikosn
9 years ago

Look into whether or not your high school is affiliated with a college in your city/town. Some schools offer college credit for classes taken in the senior year which may cut a quarter or two off the time you are actually paying for college. As for trade schools vs the traditional university, some Americans have got to stop believing that trade schools are only for those that are ‘too dumb’ to get into regular college. My man is a ‘manual labor’ guy but can hold his own in a discussion about great literature etc. And when your car breaks down… Read more »

Claire
Claire
9 years ago

I disagree with putting off saving for your child’s college before your mortgage is paid off & your retirement is “safe”. My father saved towards his retirement, my college, and paid extra on his mortgage all at the same time (and he did NOT make a lot of money & was the only income earner). Even if he could only put $10 one week towards my college fund, he did it. I am EXTREMELY grateful to him…I got measley help from scholarships & federal aid (I only took grants) but was fortunate enough to never have to take out a… Read more »

Des
Des
9 years ago

I’m on the same page as Jenessa. My BFF got a full ride for four years (graduated 2 years ago), and I got enough grants to pay most of my way. Yet, we both ended up with student loans. Why? She changed majors and had to take a fifth year. She graduated with three degrees, but none of them can get you a job so she works at a bank. I spent my grants on ridiculous extras and took loans just because I could. My point is that it wasn’t that funding wasn’t available, its that at 18 years old… Read more »

Becky
Becky
9 years ago

I am a fan of KMJ’s response. My parents said “we’re gonna contribute “X” (very small) amount. I was sort of scared into seeing that my situation was very real. I was expected to go to college, and knew I would have to figure a lot out on my own as far as how to budget and what I could and could not afford. I joined ROTC and became an officer. Got a full state tuition “waiver” for doing so. I went to the best public school in the state and selected a major where I would be able to… Read more »

Trina
Trina
9 years ago

We have been contributing $200/month for my 5 yo daughter’s education since she was born. We contribute to the Utah 529 plan (most states give you tax breaks for contributions to 529 plans, even if it’s not your own state’s plan). And, although our public high school is not great, you can do your junior and senior years of high school at 2 nearby universities for free, leaving us with only 2 years to pay for. We live in Pittsburgh, which has a number of world-class universities, so I’m going to encourage her to live at home for those last… Read more »

Janette
Janette
9 years ago

KMJ Does Becky have the answer? Your child needs to serve in the military to get an education? Don’t count on the GI Bill- it is a mess! I am not sure you understand that your children are saddled with the idea that aide is tied to YOUR salary. You can say that they are independent at 18- but the schools say 24 (unless they marry). Heck, you cannot rent a car until you are 25 and an apartment (in most cities) require either a co- signature or 2 months rent to get in the door. I hope you have… Read more »

Elysia
Elysia
9 years ago

I’m 39 and still paying my student loans and working on paying down debt and saving for retirement, haven’t managed to save much for my kids yet. My parents *were* going to pay for college but didn’t manage for any number of disastrous financial reasons. They were also super annoying about where I went and what I did for college (and I wanted to go to less expensive schools and get more useful degrees). So my goal (though I’m not sure how to achieve it) is to save SOME money SOMEWHERE for my kids so if they want to go… Read more »

Meredith
Meredith
9 years ago

This idea that paying for your children’s education creates an unnatural dependence of the children on the parents or that it encourages them to come back and live at home is hooey. My parents paid for college expenses for myself and my brother, as did my in-laws for my husband and his siblings. Everyone is now a full-functioning adult, with the added bonus of not being saddled with loans. I lived at home for 3 months after college and paid rent to my mother, my brother didn’t return home at all. If anyone needs to take out a loan for… Read more »

deb
deb
9 years ago

I am wondering about what #6 Janette said, about funding the YOUNGEST child’s fund over the oldest child’s for financial aid reasons. Does anyone have any info about this? Our oldest son is a sophomore at a state university, and our youngest is now a junior in high school. The oldest fund has enough for almost 2 semesters tuition and room/board, the youngest has only about $2500 in it. We throw what feels like tons of $$ each month at either the oldest 529 or a money market account (because the fed. tax break for tuition requires you use non-529… Read more »

chacha1
chacha1
9 years ago

Good article, Sierra. I would add that saving for college, while a great idea, should not be equated with the expectation of college. That is, let your kid(s) know you are saving but that the choice of college is up to them – and that ultimately their behavior as students will determine whether they have that choice. And then make sure that they understand the difference between a life with higher education (whether academic or a trade) and a life without. And then make sure that you have a culture of learning in your house. If you have no books,… Read more »

Wilson
Wilson
9 years ago

So my first child is about to be born in a month and I would like to get at least deposit down on saving stat. I don’t really like the idea of starting a 529 right now b/c I really want to move out of state in the next 18 years(preferably much sooner), want my child to have freedom where to choose, etc., so what are my other options to do something now while I can afford to make a lump deposit? Old school savings bond? A boring UGMA or UTMA account? Anybody have any ideas?

Becky
Becky
9 years ago

Just an FYI:
ROTC does not = GI Bill.
That is something else entirely. Yes, the GI bill is a bit messy these days.

Trina
Trina
9 years ago

Wilson; A good place to start is http://www.savingforcollege.com/. There are lots of resources there to learn about 529 plans and other ways of funding college. I noticed you said you didn’t want to start a 529 plan now because you may want to move to another state. Please note that for most states and plans, it doesn’t matter where you live or where your child goes to school. I live in PA, invest in the Utah plan, and my daughter will be able to use the funds in any state. Morningstar also issues comparisons and ratings on the diffent plans,… Read more »

Konrad
Konrad
9 years ago

Emily: keep in mind that you can use your Roth IRA for higher ed expenses if needed. There’s some debate on whether its better than 529’s or other dedicated plans, but I have chosen to use it for several reasons: – withdrawals on all CONTRIBUTIONS are tax- and penalty-free. If you are maxing out two Roth IRA’s right now that will allow you to contribute $180k in 18 years. – if do you have to dip into EARNINGS, the 10% early withdrawal penalty is waived if used for higher ed (but you do still have to pay income taxes on… Read more »

Briana @ GBR
Briana @ GBR
9 years ago

I’m only 20 but thinking about having kids in the next few years. I want 4 kids, and of course want to save up for them to go to college. I want to start a 529 for all of them as soon as their born and start contributing to it. Let’s say they’re all 2 years apart. 1) How much should I contribute monthly for each? 2) Should the contributions be distributed evenly or staggered, because of the differing ages? Sorry if this question is too complex.

dotCOMreport.com
dotCOMreport.com
9 years ago

GREAT tips on 529’s, both from the blog post and the comments that followed. Very inspiring. Thanks.

GayleRN
GayleRN
9 years ago

A simple and often overlooked solution is US savings bonds. When used for educational expenses they can be tax free federally. I believe they are always tax free at the state level. I used this quite effectively.

Matt
Matt
9 years ago

What about Education Savings Accounts? Aren’t they pretty good for saving for a child’s college?

jim
jim
9 years ago

re #1 Meghan, the Stafford loans are just fine. You can get income based repayment and the current rate is just 4.5%. Private student loans are much worse though and I’d avoid those.

I don’t think that paying down off mortgage should be a priority over college savings.

I certainly agree that your own retirement should take precedent over saving for your kids. Theres no reason that everyone should be paying 100% of their kids college. Kids can take loans and contribute their own money. You can’t get loans and scholarships to retire.

Jane
Jane
9 years ago

I’m with Konrad. We are treating our Roth IRAs as a college fund, since you can withdraw contributions (not earnings). This way the money is not tied up in a 529. Plus it seems like it would be better for financial aid, since they don’t count retirement funds in the formulas.

J.C.
J.C.
9 years ago

We arrived in the US 5 yrs ago from a Northern European country whose government pays for higher education. Aside from having to learn all about American 401k’s, mortgages, credit cards etc, we’ve also had college costs for our 3 children hanging over our heads. Our eldest just graduated from High School this summer, so we have had next to no time to save before the dreaded payments were upon us. Our kids have also had to play catch up in English in order to be eligible for the same opportunities as their peers. Our big question has been, how… Read more »

David/moneycrashers
David/moneycrashers
9 years ago

I think it would be helpful to look at it from this standpoint: Your children would probably be a lot more content if they had to pay for their own eduction (or a larger percentage of it) and know that you were taken care of financially in retirement than the other way around.

School Grants
School Grants
9 years ago

Figuring out how you are going to afford the high costs of higher education can be an intimidating prospect for anyone. However, you should not be dissuaded from furthering your education because you think you will not be able to afford the expense. Instead, spend some time researching all of the financial aid or college grants you may qualify for; some of which may include federal school grants.

El Nerdo Loco
El Nerdo Loco
9 years ago

I sort of favor the model of “education for working adults”. Most 18 year olds want to experience various sorts of altered states, find out all about sex, and party until the next morning as often as possible. Is this the right time to decide your future and your career, with your hormones raging and your mind full of phlogiston? For most people, no. I know very few people who ended up working in their field of studies. I know people who changed majors every year. Took 6 years to graduate. Student loans for a trip to Europe. Sure, knowledge… Read more »

Dan J
Dan J
9 years ago

Yikes, I always wondered how people could afford college in America.

In Australia, you don’t have to save up for college. The government just gives you the money for it…and when you earn over 40,000, a small percentage of your wage (about 3%) is subtracted from your pay untill your debt it paid off.

Three cheers for socialism!

BB
BB
9 years ago

Most schools don’t include these assets at all in their financial aid calculations. A few elite private schools do, but they won’t expect you to dip into them as heavily as your cash savings accounts.

I’m laughing and crying at this. Having one child done with college, 1 in college, I can tell you that colleges demand to know exactly how much equity is in your house and how much is in your 401(k). It’s not a few elite colleges, it’s most colleges – any that use the CSS along with the FAFSA to calculate financial aid.

MutantSuperModel
MutantSuperModel
9 years ago

This is why I got a job at our local university. Three kids’ educations = paid for. Mine too. 😉

KMJ
KMJ
9 years ago

@Janette #18
You can be declared financially independent from your parents. Believe me, I did it and it was several years before I had turned 24.

For every rule, there is an exception.

The Other Brian
The Other Brian
9 years ago

I’ve thought about creating a 529 plan for my children’s education but listing myself as the beneficiary. I would need to list the child as a beneficiary at some point but would wait until it was absolutely necessary. Depending on the account value, this could be during the final couple of years of my youngest child’s education.

Looking at the FAFSA rules, a parent can shelter $45K of investment money OUTSIDE OF RETIREMENT ACCOUNTS from being counted at all. Of course, by the time my kids are in college, 45K will cover a single semester’s worth of textbooks….

JM
JM
9 years ago

For Oregon residents, be sure to choose one of the two plans authorized by the Oregon 529 College Savings Board so that you can deduct your contributions from your income for purposes of calculating your Oregon income tax. If you choose another 529 you can’t take advantage of that deduction. While we are on the subject, there is really only one good choice among the two Oregon plans. The MFS Plan, which can only be purchased through financial advisors, is, in my opinion, not as attractive as the TIAA-CREF administered Oregon College Savings Plan. The MFS plan has much higher… Read more »

Dwight
Dwight
9 years ago

Great post and really like how you laid out the 529 plan, should make more parents think that they should start to plan for college from the very beginning before inflation catches up. What’s up with the student loan entrapment of big lenders now? If you can stay away from those, you could save a bundle funding your own college tuition with state grants e.t.c.

Cortney
Cortney
9 years ago

@KMJ- I don’t know how old you were when you were declared an independent far before 24, but at least in Texas, the only way you can be considered an independent before 24 is in SERIOUS extenuating circumstances. I worked from the time I was 14 years old to buy school supplies and books and clothes, I had a full scholarship and a full time job in college, and I lived completely on my own. I didn’t qualify as an independent. I was told I had to be married, or my parents had to have been declared LEGALLY INSANE or… Read more »

Elysia
Elysia
9 years ago

So, I asked my financial advisor (hah) about my 529 plan fees, and she said: “The 529 accounts each have an annual fee of $25.00. Internal management fees for the individual funds are 2.06%. The internal management fee comes off of the rate of return on the fund, so it is not a fee that you actually see. For example, if the fund earned 12.06% for the year, 2.06% is taken off for the management fee and you realize a 10% rate of return.” Is the .2% to 2% and up THIS internal management fee? If so, can I switch… Read more »

Nate
Nate
9 years ago

There’s more than one way to save for college. The difference with using a plan other than 529 is that it can be more flexible if your child ends up not attending college or they end up getting a scholarship, financial aid, grants, etc.

One other thing to remember is the rising cost of tuition and other college fees. Costs usually increase every year. If you save money based on current costs, you could find yourself short of funds by the time your kid attends college.

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