Over the past few decades, the cost of postsecondary education in the United States has skyrocketed, creating a college affordability crisis. The situation has left many wondering how to save for college without racking up huge amounts of student debt.
But just how much does college cost nowadays? According to the College Board, the average cost of tuition and fees for a full-time student at an in-state, public four-year university is $10,440 for the 2019-2020 school year, up from $5,170 in 1999-2000. Private four-year colleges cost even more — an average of $36,880 for tuition and fees, up from $13,000 two decades ago.
Multiply the current costs by four years and you're looking at a total expense ranging from around $40,000 up to about $150,000 per student — not factoring in any costs for room and board. It's easy to understand why Americans have accrued $1.5 trillion in student loan debt as of 2019, and why 54% of young adults who attend college take on some debt for their education.
But don't panic! There are strategies that parents and students can use to grow their college funds, minimize debt, and reduce the stress involved with figuring out how to afford college. The first step is calculating how much you need to save.
How Much to Save for College
The amount you should save for college depends on the type of college you plan to attend, where you plan to live, your family's financial situation, and how much you can expect to receive in financial aid.
For example, if a student plans to attend a public in-state four-year college, they can expect to pay $41,800 for tuition and fees and approximately $5,200 for books and supplies over four years. The total would be $47,000. They can also expect an average of $7,500 in financial aid because they are attending a public school which leaves the total amount to save at $40,000.
For an in-depth look at the average pricing for tuition and fees, books and supplies, room and board, and other expenses at various types of institutions, refer to the latest report from the National Center for Education Statistics and the estimations from the College Board. You can also estimate the amount of federal student aid you are likely to receive using the FAFSA4caster tool.
Subtract the total financial aid you can expect to receive from your total estimated college cost to get how much you should save.
The earlier you identify your goal and make a plan, the more you will likely be able to save.
Tips for Saving Money for College
Now that you know how much to save for college, how exactly can you reach your goal if you are a student trying to save money on your own? Below, you can find 10 ways to save money, either as a student saving money on your own or with your family's financial support.
Remember, even if you don't meet 100% of your goal, every dollar saved is one less that is borrowed.
Tip 1: Apply for scholarships
Scholarships usually don't cover the full cost of tuition, but they are a great way to supplement savings and reduce college debt. Ideally, you should start applying during your junior year of high school. Scholarships.com is a great resource for finding grants and scholarships that you may qualify for. Additionally, look for scholarships offered in your local community.
Tip 2: Take AP, IB, or community college classes
High school students can take Advanced Placement (AP), International Baccalaureate (IB), or community college courses to earn college credits. Doing so allows you to skip some general education courses during your freshman year, which can cut down your tuition costs. You might as well get as many classes out of the way as possible at a more affordable rate.
Tip 3: Put your savings in a CD to earn extra interest
According to the FDIC, regular savings accounts earn an average of only 0.09% in interest per year, while CDs average from 0.10% for a one-month CD up to 0.95% for a 60-month CD. While you will easily find rates far above the national averages by shopping around with a few lenders online, CDs generally offer higher returns than interest savings or checking accounts across the board.
If you won't need your college savings for a few more years, it's a good idea to put the money into a long-term CD. This helps your money grow without putting it at risk, like investing it in the stock market might. However, if you need your money relatively soon, even moving it into a one-year CD from a savings account will likely give your returns a boost.
Tip 4: Enter contests to earn cash
Many organizations like the National YoungArts Foundation run competitions for students in which winners receive monetary rewards. YoungArts' National Art Competition offers rewards up to $10,000. You can enter them to build up your resume and hopefully earn cash to cover your college expenses. Other contests to check out include:
Tip 5: Use the Upromise Mastercard to earn 529 cash
The Upromise Mastercard allows you to earn 1.25% cashback on all of your purchases, which gets deposited directly into a 529 account — a type of college savings account described in the next section. Plus, you can earn more when you dine out or shop online. Eating at your favorite restaurants will get you 2.5% cashback, and shopping at select retailers will earn you 5%. If you can't get approved on your own yet, you can ask your parents to sign up or cosign for you. You can ask other family members to sign up and use their rewards to contribute to your plan.
Tip 6: Contribute to a college savings account
Many college savings accounts, such as Coverdell ESA and 529 plans, offer benefits like tax-free growth and withdrawals while having a minimal impact on your financial aid eligibility. In the next section, find an in-depth comparison of the most popular types of college savings accounts you can choose from.
Tip 7: Sell things you don't need
Have a bunch of gently used things you no longer need such as clothing you've outgrown, electronics, or sports equipment? Put it up for sale and save the money you earn for your college expenses. The whole family can even pitch in by cleaning out their closets and putting together a garage sale. Prefer to sell online? Add your items to Craigslist, the Facebook Marketplace, Etsy, eBay, or an app like Poshmark.
Tip 8: Ask family members to contribute
Instead of receiving gifts for your birthdays or graduation, you can kindly request that friends and extended family members donate money to your college fund. Many 529 plans have gifting platforms that allow relatives to make secure electronic deposits, which makes it easy for them to contribute. They can simply send cash or checks.
Tip 9: Get a part-time job
Picking up a part-time job after school or during the summer is a great way to add extra money to your college fund. While in school, some common opportunities include babysitting, being a lifeguard, mowing lawns, tutoring, bussing tables, or working for a local business owner in your community.
Tip 10: Automate your savings contributions
Lastly, automating your savings contributions so that they come directly out of your paycheck is a great way to make saving a priority. It helps you see it as just another monthly expense and get into the habit of setting aside money. You can ask your parents to do the same.
All of these tips can help you boost your savings even if you are the only one saving for your education. Next, let's take a closer look at various college savings accounts so that you can identify which one may be the best fit for you.
College Savings Accounts
In most cases, college savings accounts are opened by parents as a way to save money for their child's future educational expenses. However, some types may be opened in the student's name or by the student. Each account has a different set of eligibility requirements and limitations. Some accounts, like the Coverdell ESA, have income limits, while others, like the 529, do not.
The 529 College Savings Plan is generally the most recommended college savings account, but check out our list below to see all of your other options so you can decide which one is right for you.
- Education Savings Accounts (Coverdell ESA)
What It Is
Coverdell Education Savings accounts are tax-advantaged investment accounts that help families pay for education-related expenses. They have lower fees and more investment options than 529 plans, which makes them an attractive choice.
- Can be used for primary or secondary education.
- Tax-free withdrawals when the funds are spent on qualified educational purposes.
- Are FDIC-insured in some cases.
- Contributions must be used by the time the student is 30 years old.
- Has income restrictions; ability to contribute gets phased out for single filers who make more than $95,000 and joint filers who make more than $190,000.
- Contributions limited to $2,000 per child each year.
- 529 Plans
What It Is
A 529 is a tax-advantaged investment vehicle similar to a Roth IRA. There are two types of 529 plans: the College Savings Plan and Prepaid Tuition Plans. The College Savings Plans can be used for all education-related expenses, including books and some room and board, while the Prepaid Plans can only be used to cover tuition and fees.
- Contributions can be used by your child at any time throughout their life.
- No income restrictions.
- Investments are not FDIC-insured.
- Contributions can only be used for educational purposes.
- Non-education expenses are taxed.
- UTMA or UGMA
What It Is
UTMA and UGMA accounts are custodial accounts that can be used to hold funds for minors until they come of age. UGMA accounts mature when the child turns 18, while UTMA accounts can be held in trust until the recipient turns 25.
- Funds can be used for more than just education-related expenses; if your child wanted to open a business with the money in the future, for example, they could.
- Anyone can make contributions to the account in the form of stocks, bonds, mutual funds, and even intellectual property.
- All purchases made with the account are taxed.
- Affects what the student receives in financial aid more than a 529 plan.
- After the account is set up, the beneficiary can't be changed.
- Mutual Funds
What It Is
Mutual funds are professionally managed investment portfolios that pool money from many investors to buy shares of stocks, bonds, and other securities. Some people believe that mutual funds offer higher returns than 529 plans, which is why they've become popular for college savings.
- Money can be used for anything, not just education-related expenses.
- No age requirements or restrictions.
- Could lead to higher returns than other college savings accounts.
- Mutual funds distribute capital gains, which will be counted as income and affect your family's eligibility for financial aid.
- Must pay taxes on capital gains.
- Funds have a kiddie tax; any income a child gets over $1,700 can be taxed at their parent's highest tax rate up to age 23.
- Qualified U.S. Savings Bonds
What It Is
Savings bonds are a type of government-issued investment vehicle that offers a fixed rate of interest over a set period of time. The returns from bonds are modest, but because they're backed by the federal government, they're safer than other investments.
- Bonds are guaranteed by the U.S. government, making them a safe investment.
- Interest is tax-free if used to pay for educational expenses.
- If bonds are in the parent's name, they won't have an impact on the child's financial aid.
- No age restrictions.
- The returns that you'll receive from bonds are smaller than other investments.
- Education bonds can only be used for educational expenses at universities eligible for federal financial student aid.
- Education bonds can't be used for things like books and room and board.
- Roth IRA
What It Is
Roth IRAs are tax-advantaged retirement accounts that can also be used to save for college.
- Funded with after-tax dollars, so money grows tax-free.
- Funds can be used for your retirement or your child's education, which gives you flexibility.
- You can withdraw the money you've contributed at any time without penalty.
- The money you withdraw from your Roth IRA each year to pay for your child's college counts as income and is counted on FAFSA applications.
- Contribution limit of $6,000 per year.
- Any earnings you withdraw before age 59.5 are taxed.
The rising costs of college tuition can make it difficult to afford college. Unfortunately, many students turn immediately to various loans to cover their expenses. However, it's important to understand that you have other options.
If students and parents plan ahead, utilize saving accounts that offer the most advantages to their situation, employ various saving strategies, and take full advantage of available financial aid, it is possible to afford college and graduate with a minimal amount of debt. As a result, students can start off their careers without the large burden of repayments, and parents can stay on track to retire according to plan.
Jessica Walrack is a personal finance writer whose work has been featured on SuperMoney.com, Interest.com, The Simple Dollar, PersonalLoans.org, and more. She specializes in writing about personal finance topics related to loans, credit cards, banking, and budgeting.