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How to Start Saving for Your Kids’ College

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Updated May 8, 2024

College is a proven path to higher career earnings. A bachelor's degree alone can increase your lifetime earnings by as much as $630,000 to $900,000 or more. With this in mind, many parents are hyper-focused on their kids attending college and finding a lucrative career.

However, the average cost of college in the U.S. is $36,436 per year, including books, supplies, and daily living expenses. Saving for college is key to avoiding debt and having student loan payments that impact your children’s future finances. Here's how to start saving for your kids' college expenses so they can graduate debt-free.

529 plan

A 529 college savings plan is one of the most common ways for parents to save for their kid's college expenses. These investment options are offered by individual states through investment companies. You do not receive Federal income tax deductions, but some states offer income tax incentives to residents.

Contributions in a 529 plan are invested in pre-defined portfolios. Many parents choose age-based portfolios with investments that become increasingly conservative as their child gets closer to graduating high school.

Donations of up to $18,000—the IRS annual gift tax exclusion limit—can be made to each child from every donor. There is a five-year gift-tax averaging exclusion where you can make five years' worth of donations in a single year to front-load the child's 529 plan. This means each parent can gift each child $90,000 ($180,000 per couple) today to fund their college savings account, as long as they don't make additional gifts for the next four years. Front-loading the donations allows more time for the money to grow tax-free and can assist estate planning strategies for seniors.

Coverdell education savings account (ESA)

A Coverdell ESA is an investment account designated for a child's education expenses. It offers more flexible options than a 529 plan, including the ability to pick stocks, bonds, mutual funds, and other investments rather than choosing from preset portfolios.

The money can be spent tax-free on tuition, fees, books, supplies, and other eligible school expenses. The Coverdell ESA was originally designed for college expenses, but it has since been expanded to include eligible costs for elementary, middle, and high school students. Unlike a 529 plan, there is no cap on how much can be used for elementary and secondary expenses.

Parents can contribute up to $2,000 per year for each designated beneficiary until they turn 18 years old. The contribution limit is $2,000 per child yearly, no matter how many people want to contribute. However, contribution limits may be reduced based on your income. If your modified adjusted gross income (MAGI) is more than $110,000 as an individual or $220,000 if filing jointly), you are unable to contribute.

Prepaid tuition programs

One way to reduce the future cost of college is through a prepaid tuition program. This allows parents (and other relatives) to prepay tuition at today's rates to avoid rising costs due to inflation. Prepaying for tuition also alleviates investment risk since you don't have to worry if your investments will grow fast enough to cover the rising cost of going to college.

The downside with a prepaid tuition program is that you've locked your child into attending a state school in your home state that may not align with their changing interests. The money is not lost if they decide to change majors, move away, or stop school. All prepaid tuition plans allow the money to go to a different school. Additionally, most prepaid plans allow transfers to siblings. Many states have ended their prepaid tuition programs.

Consistent savings

Saving for a child's college education can be daunting. The amount of money is overwhelming when you think about it in total dollar terms, but it is much more doable when you break it down into monthly installments over many years.

For example, the annual college cost of $36,436 per year is just $168 per month if you save for 18 years beginning when your child is born. Start off with a high yield savings account, then upgrade to an investment account as your balance increases. If your investment returns are higher than inflation, the amount you'll need to save every month is even smaller.

When thinking about paying for a child's college education, don't get upset if you aren't able to pay for the full amount. Saving consistently can greatly reduce how much they'll need to borrow or depend on grants and scholarships.

Put money into savings bonds

Savings bonds are often overlooked when saving for the future. U.S. Treasuries are exempt from state and local income taxes, which can be a huge benefit for parents who live in high-tax states. Additionally, when you use the money for higher education expenses, you may not have to pay Federal income taxes on the interest. You can buy bonds directly from the government at Treasury Direct or use an investing platform like Public, where you can safely store your Treasuries and invest in stocks, bonds, and crypto as your experience grows.

Under the Education Savings Bond Program, the deduction depends on the amount of bonds redeemed versus the total qualified education expenses. If your bond total exceeds education expenses, your deduction may be reduced. The ability to exclude bond interest starts phasing out at MAGI of $91,850 for individual taxpayers ($137,800 for married filing jointly).


Having a true understanding of the cost of your child's preferred college helps to understand how much you'll need to save. When they narrow down their list of colleges, you can contact the school to request a "cost of attendance" form.

Alternatively, you can use free online calculators to estimate the cost. This approach gives you a head start while your child is researching schools. Additionally, a general understanding of college costs helps if your child's choices change or if they don't get accepted into their first choice.

Talking to your student about budgeting is also an excellent conversation to set expectations. Life at school is usually quite different from living at home. They may have to sacrifice their lifestyle, eating habits, entertainment, and other expenses to afford the college of their dreams. Personal finance apps like Empower make it easy to create a budget when you link your bank accounts, credit cards, loans, and other financial accounts.

Cut costs

Cutting monthly expenses is an excellent way to find money to pay for college. Too often, families waste money on everyday purchases that could be saved and invested. Rocket Money reviews your linked bank accounts and credit cards for recurring transactions. This lets you see where you're spending money and decide if those expenses align with your goals.

You may be able to cut back or eliminate certain expenses that don't matter as much, such as eating out, multiple streaming services, and name-brand clothing. Refinancing debt can also reduce your monthly expenses by lowering the interest rate or spreading out the payments. Review your cell phone plans, internet service, insurance policies, and other bills to see if you can lower expenses by switching or taking advantage of promotions. These can all be managed by money saving apps.

Invest in mutual funds

Families who are unsure about locking money into a 529 plan may choose to invest in mutual funds, ETFs, or stocks in a taxable account. Investing through a brokerage account, like JP Morgan SDI, or directly with an investment company allows you to save for college expenses while maintaining flexibility. This strategy also significantly expands the available investment choices versus having to choose among limited options. The only major downside is that you may owe taxes on earnings, dividends, and capital gains.

Employer-provided education assistance

For some parents, working for the right company can help cover a child's college expenses. Many companies offer tuition programs for eligible workers that cover the worker or their children. Under the IRS employer-provided education assistance program, workers can exclude up to $5,250 of benefits from their taxable income annually through the end of 2025. If the company pays more than this limit, you'll only owe taxes on the overage.

Tax-advantaged account

Retirement savings accounts such as traditional and Roth IRAs offer tax-advantaged savings for workers. These accounts are offered by Robinhood and other financial services companies. The money grows tax-deferred, so you don't have to pay taxes on the gains, dividends, and other earnings.

While this money is designated for retirement, it can be withdrawn for qualified higher education expenses without paying a 10% early withdrawal penalty. However, you may owe income taxes on traditional IRAs or when your Roth IRA is less than five years old.

Cash-value life insurance

If you have a cash-value life insurance policy, you may be able to access the money inside of it tax-free. Whole life, universal life, variable universal life, and similar policies charge higher premiums than term insurance because they invest the excess money. This money grows tax-deferred, and it can increase the death benefit to beneficiaries or reduce future required premiums.

Some insurance companies allow policyholders to access the cash value tax-free through low-cost loans. These loans typically do not require a credit inquiry, proof of income, or regular monthly payments. However, the outstanding balance is generally deducted from the death benefit. This means your beneficiaries will receive less money if you die before the loan is repaid.

Compare cash-value life insurance versus a term policy, like one from Fabric, to determine their cost. Some investors choose to buy term policies and then invest the difference on their own. This allows for greater control, including the option to invest in a 529 plan, brokerage account, or savings account.

Home equity loan

As home values increase and mortgage balances are paid down, your home equity increases. Parents can tap into their home equity to pay for a child's college education. Home equity lines of credit (HELOCs) offer flexible withdrawals and interest-only payments, while home equity loans provide a lump sum with fixed monthly payments and interest rates.

Like a traditional mortgage, getting a HELOC or home equity loan often takes several weeks for underwriting, appraisals, paperwork, and other factors. Plan ahead to secure these financing options if you want to use them to pay for college expenses. Unfortunately, homeowners can no longer deduct these interest payments from their income taxes.

TIME Stamp: Start early and use tax incentives to save for college

Attending college in the U.S. is expensive, but starting to save for your child's college education at an early age reduces the amount you need to save each month. Taking advantage of lucrative tax benefits can also save money. Even if you have to begin with a small amount, the most important factor is starting early to benefit from compounding interest.

Many families rely on multiple strategies, including 529 plans, cutting costs, tapping into home equity, and more. Having good grades and being involved in the community may qualify your child for scholarships and grants that can further reduce the out-of-pocket cost of attending college.

Frequently asked questions (FAQs)

What happens to a 529 when a kid doesn't go to college?

If your child doesn't go to college, they can let the money grow to use in the future. Many children aren't ready to attend college right after graduation but may decide to pursue a degree or other eligible courses later in their careers. If not, they can save the money for their children or gift it to any family member.

The rollover amount from a 529 plan into a Roth IRA account is subject to the same Roth IRA annual contribution limits set by the IRS. Under the SECURE 2.0 Act, beneficiaries can roll over up to $35,000 to a Roth IRA—the lifetime limit per beneficiary for 529 plan rollover contributions to a Roth IRA.

Why is it never too early to start saving for college?

Starting to save for college early is the best way to take advantage of compound growth. When you start early, you can save less each month to arrive at the same total than if you wait until your child is older. Some parents start saving under their own name before having children to put away even more money. When the child is born, the parents transfer the money to their account.

How much might college cost for a family with a toddler in 2022?

Future college costs for young children are difficult to calculate due to uncertainty over inflation, college choices, and financial aid. Parents of a two-year-old child can expect to pay $311,000 for four years of in-state public school or $712,000 for a private college. These totals include tuition, fees, and room and board with an expected inflation rate of 7%.

Is a 529 the best way to save for college?

A 529 plan is the best savings account for college because of its tax advantages and high contribution limits. The accounts also have no income limitations to prevent high-income earners from contributing. Additionally, 529 accounts do not have mandatory distribution dates, and unused money can be transferred to any family member.

What is the disadvantage of a 529 plan?

One of the biggest disadvantages of 529 plans is that you have to choose from predefined portfolios. Account owners cannot choose individual stocks, bonds, and other investments. Instead, you have to select from the portfolios offered by the investment company that manages the program.

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