How to Save for College
Essential Tips and Savings Plans
- Tuition costs have risen sharply in recent years, causing an affordability crisis for students.
- You can estimate how much to save by analyzing the average costs for tuition and supplies.
- Saving now is key — students should look into scholarships and part-time work.
- A college savings account can help you save and grow money for your education.
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 $10,560 for the 2020-21 school year, up from $5,260 in 2000-01. Private four-year colleges cost even more — an average of $37,650 for tuition and fees, up from $24,100 two decades ago.
Multiply these costs by four years and you're looking at total expenses ranging from around $40,000 to about $150,000 per student — not factoring in any costs for room and board. It's easy to understand why Americans have accrued $1.7 trillion in student loan debt, and why around 70% of young college-going adults take on some debt for their education.
Fortunately, there are strategies 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 to calculate how much you need to save.
How Much Money Should You Save for College?
The amount you should save for college depends on the type of college you want to attend, where you plan to live, your family's financial situation, and how much money you can expect to receive in financial aid.
For example, if a student plans to attend a public, in-state college, they can expect to spend, over all four years, around $42,000 on tuition and fees, $5,000 on books and supplies, and (if applicable) $46,000 or so on room and board. They can also expect to receive about $29,320 in grant aid. This leaves the total amount to save for college at approximately $64,000.
For an in-depth look at the average costs of 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 2020-21 projections provided by the College Board. You can also estimate the amount of federal student aid you're likely to receive using the FAFSA4caster tool.
Once you have added together your estimates for how much you'll pay in tuition and fees, room and board, and school supplies, subtract the total financial aid you expect to get to see how much money you should save.
The earlier you identify your financial goals and make a plan, the more likely you'll be able to save successfully for school.
10 Essential Tips for Saving Money for College
Now that you know how much to save for college, how can you reach your goal — especially if you're a student trying to save money on your own?
Below, you'll find 10 ways to save money for school, either as a student saving on your own or with your family's financial support. Remember that even if you don't meet 100% of your goal, every dollar saved is one less you'll have to borrow.
Apply for Scholarships
While scholarships usually don't cover the full cost of tuition, they're a great way to supplement your savings and reduce college debt. Ideally, you should start applying during your junior year of high school. We created a list of the best resources you can use to find grants and scholarships. Be sure to also look for local scholarships offered in your community.
Take AP, IB, and/or Community College Classes
High school students can take Advanced Placement, International Baccalaureate, and community college courses to earn college credit. Doing this allows you to skip some general education courses your freshman year of college and effectively bring down tuition costs. You might as well get as many classes out of the way as possible at a more affordable rate.
Put Your Savings in a CD Account to Earn Extra Interest
According to the FDIC, regular savings accounts earn an average of only 0.05% in interest per year, whereas CDs average anywhere from 0.04% for a one-month CD to 0.33% for a 60-month CD.
A CD, or certificate of deposit, is a type of savings account with a fixed interest rate over a specified time frame. While you'll likely 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.
If you won't need your college savings for a few more years, it's a good idea to put any money you accumulate in a long-term CD. This way your money can grow risk-free. If you'll need your money relatively soon, however, even moving it into a one-year CD from a basic savings account should give your returns a boost.
Enter Contests to Earn Cash
Many youth-oriented organizations, like the National YoungArts Foundation, run competitions for students in which winners receive monetary rewards. YoungArts' National Arts Competition offers awards up to $10,000. By entering contests, you can bolster your resume and potentially earn some cash to cover college expenses.
Here are some other contests to check out:
Use the Upromise Mastercard to Earn 529 Cash
If you can't get approved for this card on your own yet, consider asking your parents to sign up or cosign for you. Family members can also use their rewards to contribute to your plan.
Open a College Savings Account
Many college savings accounts, such as Coverdell ESAs and 529 plans, offer benefits like tax-free growth and withdrawals while having minimal impact on your financial aid eligibility. In the next section, you'll find an in-depth comparison of the most popular types of college savings accounts.
Sell Stuff You Don't Need
Have a bunch of gently used things you no longer need, such as clothing you've outgrown, old 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.
Those who'd prefer to work online can advertise their items on websites like Craigslist, Facebook Marketplace, Etsy, and eBay.
Ask Family Members to Contribute
Instead of receiving gifts for your birthdays and graduation, kindly request that your friends and extended family donate money to your college fund. Many 529 plans have gifting platforms that allow relatives to make secure electronic deposits, making it easy for them to contribute. They can also simply send cash or checks.
Get a Part-Time Job
Picking up a part-time job after school or during the summer is a great way to bring in some extra money for your college fund. Common gigs include babysitting, becoming a lifeguard, mowing lawns, tutoring, bussing tables, and working for a local business owner.
Automate Your Savings Contributions
Automating your savings contributions so they come directly out of your paycheck is a great way to make saving a priority. You'll see the reduction as just another monthly expense and get into the habit of setting money aside. You can ask your parents to do the same, too.
All these tips can help you boost your savings, even if you're the only person saving for your college education. Next, let's take a closer look at the different types of college savings accounts there are so you can find the best fit for you.
The 6 Types of College Savings Accounts
In most cases, parents open college savings accounts 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 comes with 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 the most often recommended college savings account, but check out our list below to see all of your other options so you can decide which is right for you.
- Education Savings Account (Coverdell ESA)
WHAT IT IS
Coverdell education savings accounts are tax-advantaged investment accounts that help families pay for education-related expenses. They offer lower fees and more investment options than 529 plans, making them an attractive choice for soon-to-be college-goers.
- Can be used for primary, secondary, or postsecondary education
- Offers tax-free withdrawals when funds are spent on qualified educational purposes
- FDIC-insured in some cases
- Contributions must be used by the time the student is 30 years old
- Income restrictions mean the ability to contribute gets phased out for single filers making more than $95,000 a year and joint filers making more than $190,000
- Contributions limited to $2,000 per child each year
- 529 Plan
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 former can be used for any and all education-related expenses, including books and some room and board, whereas the latter 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 does
- 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 mutual funds offer higher returns than 529 plans, making them popular choices 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 earns over $2,200 can be taxed at their parent's highest tax rate, up to age 23
- Qualified U.S. Savings Bonds
WHAT IT IS
A savings bond is 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 impact the child's financial aid
- No age restrictions
- The returns you'll receive from bonds are smaller than those from 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 living expenses
- 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, giving you flexibility
- 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 is considered income and counted on FAFSA applications
- Contribution limit of $6,000 per year
- Any earnings you withdraw before age 59 and a half are taxed
The Importance of Saving for College
The rising costs of college tuition make it difficult to afford college. Many students turn immediately to loans to cover their expenses — but the truth is you have other options.
By planning ahead, opening college savings accounts, employing various saving strategies, and taking full advantage of the financial aid available to you, you can afford college and graduate with minimal debt. You can then start your career without the large burden of repayments, and parents can stay on track to retire according to plan.
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