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How to save for college

Published January 9, 2025

6 min read

Table of contents

Key Points:

There are multiple options available for parents wanting to start an education savings account for their children.
If you plan to cover some or all of college tuition costs for your child, you should start saving as soon as possible.
You can make saving for college easier by having automatic transfers to your college savings account from your bank account or paycheck.

Student loans, grants, and scholarships are just a few ways you can help cover the cost of a college education. And while all these ways of helping can have a big impact on paying for your child’s college, the importance of having a college savings cannot be understated. Money that you set aside for your child’s future education can go beyond tuition—towards things like books, housing, food, and other expenses your child may have at school.

Building a college savings fund is a significant, long-term, and worthwhile commitment. Even if you can only save a small amount per month, this can add up over time and help you offset the cost of college. Here are a few things you should know about starting a college savings fund.

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Different college savings options

Many people know the importance of having a college savings fund, and there are many different options to help you reach your goals. From 529 plans to Roth IRAs, each set comes with benefits and drawbacks. By understanding all these choices, you’ll be equipped to make more informed decisions about how to save your money.

529 College Savings Plan

According to U.S. Securities and Exchange Commission, a 529 plan is specifically designed for college savings. The money that you put into a 529 grows tax-free and can be used tax-free for qualified educational expenses. Examples of qualified educational expenses can include tuition, room and board, books, and more. You can even use up to $10,000 of the 529 to repay student loans.

But there are some drawbacks to a 529 college savings plan, for example, if your child does not go to college, there are limited options on what you can use the account for tax-free. There is a 10% tax penalty on earnings that are not spent on qualified higher education expenses.

Custodial Uniform Gift/Transfer to Minor Account

Another college savings option is a custodial Uniform Gift or Transfer to a Minor Account (UGMA or UTMA accounts).

As the name suggests, this is an investment account setup for a minor child but is under the control of the custodian (parent, guardian or relative) until the child becomes of age. Information from the Social Security Administration states that the money you put into a UGMA or UTMA can be used for anything, not just qualified education expenses, so you have more flexibility than a 529 account. The catch is, unlike 529 savings accounts, there are no tax benefits to UGMA or UTMA accounts. It is also important to note, according to Federal Student Aid, that FAFSA may consider UGMA or UTMA accounts a student asset, so it can impact your student’s financial aid.

Roth IRA

People typically use a Roth IRA for retirement, but there are other ways that you can get money out of your Roth IRA without penalty, like through qualified higher education expenses. That’s why some people believe that a Roth IRA is a good way to save money for college. According to the Internal Revenue Service, some of the options you have include opening a Roth IRA for a child (who must have earned income) or you can use your Roth IRA to pay for their college expenses.

The biggest drawback to using Roth IRAs to pay for college is that you could be taking out money from your retirement account. If the Roth IRA belongs to the child, it can count as income and may impact the amount of financial aid awards they can receive.

When to start saving for college?

When it comes to saving for college, the earlier that you can start, the better. You should try to start saving for college for your loved ones as soon as possible, that way there will be more savings to grow.

You can even start saving for a child’s college costs before they are born. To start saving for college before birth, you would need to open a 529 account as the owner and beneficiary. Then, you can transfer the account to the child after they have a Social Security number (SSN).

How much to save for college

The amount of money you should save for college will be different for each family and depends on your child’s chosen career field and the kind of education that career requires. Some online calculators can help give you a rough idea of what you need to save. Curtis M. Loftis, State Treasurer of South Carolina suggests the ‘2K Rule of Thumb’, which is where you multiply your child’s current age by $2,000 to see how much education savings you should ideally have by that age.

Determine how much college costs you will cover

Another point to consider is how much of your child’s college costs you’re willing to cover. Are there other sources of money available to help cover college tuition like financial aid or student loans? The average cost of a year in a public college was $9,700 in 2021 according to the National Center for Education Statistics, which is 6 percent higher than it was in 2010-11. While covering the cost of college can be pricey, even if you can’t afford to fully pay tuition, having savings will help reduce the amount of student loans you or your child will need to take out, saving you money in the long run.

Once you’ve figured out how much you want to save, you can start creating a savings plan. Every little bit you save counts. The right credit card could help you avoid over-spending with extra fees. The key is making your savings consistent, so you’ll start to see your efforts grow.

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Set up an automatic savings for college

If you plan to set aside money for college, one of the easiest ways to do this is to set up automatic savings. You can set automatic transfers from your bank account to your college savings account. You can even direct deposit a portion of your paycheck into a 529 account or other savings account.

To sum up, there are plenty of ways to kickstart your college savings journey, from 529 plans to custodial accounts. College costs can quickly rack up, not just with tuition and room and board, but other costs like food, personal care items, and travelling home from campus. A student credit card can help you cover the cost in-between. A student card can help build responsible spending habits and offer opportunities for perks and rewards, like cash back on purchases. Learn more about student credit cards.

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