Do you have any ideahow much college costs these days? If not, you might want to take a seat.
Factoring in tuition, housing and meal plans, plus fees, a public two-year degree runs about $11,600 per year,according to Campus.edu.
And a bachelor’s degree?Expect approximately $38,270.
Those figures are averages.
If you’re mapping out the expense of sending your child or grandchild to college, I realize those numbers might make you short of breath.
Whether it’s a community college, a public university or an elite private school, higher education is expensive. Americans carry more than$1.7 trillion in student loan debtto attest to that.
All that borrowing leaves many parents asking: How will tuition prices move from here?
But by using these approaches to prepare for their college years, you can decide the best way to help your student financially.
Decide What You Can Realistically Contribute and When
Many parents envision their child graduating debt-free with a degree from a respected school. That hope may be what led you here.
But it’s crucial not to let that hope cloud your judgment.
Instead of wondering what you ought to or must contribute, ask what youcanafford to contribute.
We all know the sooner you begin saving, the better your outcome will be.
If you’re behind your target, though, be wary of trying to catch up too aggressively.
Peter Magnuson, an independent financial advisor in Sarasota, Florida, notes that you’ll likely spend many more years in retirement than your child will in college.
“Would you prioritize this over properly funding your retirement accounts?”
Magnuson has observed parents taking on heavy financial obligations for their children. He’s worked with clients who, intent on covering all expenses for multiple kids, ended up working into their 70s with little retirement savings despite solid incomes.
Don’t treat college savings as an isolated goal. Consider it alongside your otherfinancial objectives.
Pay down high-interest credit cards first, then focus on saving for retirement.
Once you’re confident your broader budget is in order, you can add college savings. You don’t need to plan to shoulder every cent of your child’s education.
For example, if you begin when your child is 10 and tuck away $100 a month, you could amass at least $9,600 by college time to chip in toward costs.
Use acollege savings calculatorto gauge what’s realistic for your household, and remember you can tweak your contributions later.
Five Typical Ways to Save for College
After you’ve figured out how much you can reasonably pitch in, the next question is where to park that money. The best choice for you depends on whether you prefer conservative options or are willing to accept more risk for potentially higher returns.
Below are advantages and drawbacks of common choices.
Traditional Bank Accounts
If you’re an adult in the U.S. without a checking or savings account, you’re an exception.
Pro: Funds in these accounts are insured by the Federal Deposit Insurance Corporation (or by the National Credit Union Share Insurance Fund if held at a credit union) up to $250,000, protecting them from stock market swings.
Many banks also offer sign-up bonuses or cash-back incentives when you open a new account.
The average APY at FDIC-insured U.S. banks is about 0.45%, thoughhigh-yield savings accountshave become more common lately.
You could also buy certificates of deposit (CDs), where you deposit money for a fixed term and receive interest when it matures.
CD yields typically top out around2%.
Con: Even 2% trails most investment benchmarks. For perspective, the S&P 500 — a broad-market index tracking 500 companies — produced at least a 10% return in five of the last seven years.
That means while you’d have avoided the 4% loss the index suffered in 2018, you also would have missed the nearly 22% gain in 2017. And recently?It climbed about 16.2% in 2024.
For near-term goals, avoiding market volatility can be sensible. But if your horizon is long, market investments often yield greater returns.
529 Savings Plan
If you want your savings to stretch farther, consider a 529 plan. Offered in every state and Washington, D.C., anyone can open and contribute to these accounts.
Withdrawals used for qualifying college expenses are exempt from federal income tax.
Pro: A 529 invests your contributions in a portfolio you select, similar to managing a 401(k). Depending on the plan, you’ll often see mutual funds, ETFs and target-date options available.
This means returns tend to track the market more closely.
Plus, many states provide an income tax deduction or credit for contributions to your state’s plan.
Con: The downside is a 529’s restricted use: it’s intended for postsecondary expenses. If the child doesn’t attend college, you can change the beneficiary — or use the funds for your own education.
But nonqualified withdrawals incur federal income tax on earnings and a 10% federal penalty.
529 Prepaid Tuition Programs
Another 529 variant lets parents or grandparents lock in current tuition rates at participating in-state public colleges.
Pro: Often the state guarantees that contributions will keep pace with tuition increases, meaning the investment is protected if the fund underperforms.
Magnuson advises clients to weigh this option. “If you can afford the payment, your child will at least have the means to pursue a four-year degree,” he said.
Con: If your child opts for an out-of-state school, you typically won’t receive the full value. Also, you generally must be a resident of the state offering the plan.
If you know your child intends to attend college out of state, this approach may be less suitable.
UGMA and UTMA Custodial Accounts
These custodial accounts were established by legislation in the mid-20th century — the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act — to govern transfers of securities to minors.
They allow a donor to invest and oversee assets until the child reaches a statutory age, at which point control passes to the beneficiary.
Pro: There are no spending limits on the funds, so if you want to provide a financial cushion for the child’s adult life — in whatever form that takes — this flexibility is appealing.
Since assets are in the child’s name, some of the investment earnings may be taxed at lower rates.
Con: UGMA accounts typically grant control to the child at 18, a point critics highlight. Magnuson cautions that handing large sums to an 18-year-old can be risky if they make poor choices, and parents can’t step in.
“All you can do is shout from the sidelines and hope they make smart plays,” Magnuson said.
UTMA accounts often defer transfer until age 25, which some find preferable if they pursue the custodial route.
Ultimately, you’ll need to decide your comfort level with relinquishing control at a specified age.
Regular Investing
You’ll notice many drawbacks above involve distribution limits. You can avoid those constraints by using standard investment accounts — for example, broad index funds or ETFs.
Pro: With these vehicles, you avoid specific education rules while still benefiting from long-term market growth.
Magnuson says affluent families may realize certain advantages with specialized plans, but for most households, keeping things straightforward is best.
“For most people, my advice is to focus on saving as part of everyday life,” Magnuson said. “As you build assets, college will become an issue to handle when the time arrives.”
Thinking this way sidesteps penalties for nonqualified distributions and leaves you in control if circumstances change.
Con: Investment managers typically charge fees, often around 1% of returns.
How College Savings Can Influence Financial Aid
When choosing where to place your savings, many families worry about how their assets will affect eligibility for financial aid.
Financial aid is determined by subtracting the expected family contribution (EFC) from the school’s cost of attendance. The EFC uses a formula that accounts for family income and assets — including investments held by parents or the student.
Some grandparents open 529s in their own names to try to avoid impacting the family’s EFC. But there are trade-offs: distributions from a grandparent-owned 529 that are used by the student must be reported as the student’s income in the following aid year.
That reported income can reduce aid eligibility more than if the 529 were in the parent’s or student’s name. For that reason, a parent- or child-owned 529 is usually preferable.
Also, even after selecting an investment vehicle, don’t delay investigating financial aid options until the last minute.
Ways to Cut College Expenses
Filling out the FAFSA — the Free Application for Federal Student Aid — is critical, even if you assume your family income is too high.
The FAFSA opens doors to grants, loans, need-based scholarships and work-study jobs. It’s used by two-year colleges, four-year schools and some trade programs.
Another way to lower costs is to encourage your child to file college applications during their senior year and hunt forscholarships. Many awards don’t require perfect grades, and opportunities exist across majors and interests.
Involve Your Child in the Effort
More than 16 million American households use 529 plans to save for college, per theEducation Data Initiative.
That’s generous, but it may not fully fund four years of schooling.
Begin conversations about college when your child starts high school. Ask about their aspirations and plans — and expect those ideas to evolve through their teens. Goals in ninth grade can look very different by graduation.
Be transparent about what your family can realistically contribute.
Honesty about financial commitments helps set reasonable expectations for college choices and costs.
Encourage your child to get part-time work to save. Those holiday gift checks, earnings from a summer job or a modest paycheck can inch your family toward your education savings target.
If they need extra ideas, there are plenty of ways a teen canearn extra money.
This article provides general information about your options but is not personalized investment advice or a recommendation. Individual circumstances differ. Consult a licensed professional for tax, legal, financial planning or investment guidance.
Jordan Hayes is a former staff writer at Savinly.
Former editor Evan Clarke contributed to this piece.
