Learn effective strategies to start saving for your child's college today. Secure their future with smart, achievable goals.
Parents want to give their children the world. But with inflationary pressures persisting and the cost of daily life at a historic high, this presents a bigger challenge today than it did, say, twenty years ago. Despite these challenges, however, parents still work to make their children’s dreams come true. When children are young, these dreams mostly take place in the toy aisle and the drive-thru. Then the setting shifts to a theme park or clothing store. And before long, the dream drifts to college –– no longer a Happy Meal–sized financial proposition. That's when college financial planning becomes crucial to ensure that these dreams can become a reality.
The cost of college has skyrocketed in the past 20 years.1 Many families find themselves asking how to pay for a child’s college, but you might be surprised to hear that the answer isn’t that different from paying for any other large expense. Saving is still the best approach. So, with college tuition costs at historic highs, how can parents reasonably save for college? Discover some of the most popular college saving strategies –– and some you might not yet have considered –– below.
The elevated (and still rising) college cost is a frequent talking point, both in the media and in our day-to-day conversations. But how much more expensive has it really gotten? Let’s examine the upward trends over the past several decades to figure it out for sure.
In 1980, the cost of college –– including tuition and fees for the full four years –– barely crested $1,600. Ten years later, that figure had more than doubled, and by the year 2000 the same education would cost $7,360: successfully quadrupling in just two short decades.2 Flash forward to 2024, and that number has now ballooned to over $10,000 for in-state students each year, with out-of-state students regularly paying double and students at private colleges coughing up that number four times over.3
While it can be easy to reduce these increases to greed, numerous factors are to blame for the price hike, chief among them being declining state funding and the evolving list of amenities and services offered by universities. Still, this rationale doesn’t make it any easier for parents to stomach the tuition bill.
Tuition may be one of the most notable college expenses, but it’s not the only one –– and it may not be the primary one for long. Textbooks, technology, transportation, and dining can eat up a significant portion of a college budget, but it’s housing that can be make or break. Many schools across the country have raised their room and board rates by double-digit percentages, with schools like the University of Alabama and the University of Virginia raising their room rates by 64 percent and 37 percent, respectively.4 It’s not uncommon for additional costs like housing, textbooks, and meal plans to collectively outweigh college tuition. But if this upward trend persists, on-campus housing alone may soon cost more than the education it’s meant to facilitate.
The costs of college are abundant, which is why it’s crucial parents have a plan for saving for a child’s schooling. The first step: understanding your financial situation and getting a clear idea of what your child’s total education costs might look like when they’re ready to leave the nest.
Projecting potential college costs can be daunting, but it's a pivotal step in developing your savings strategy. While we’ve already outlined some average costs, factors like public versus private college and in- or out-of-state tuition will make a big difference. Determine what the best educational pathways will be for your child(ren), then use online calculators accounting for inflation to get an estimate of what the financial obligation will be when it comes time for them to enroll.
While you forecast future educational expenses, be sure to zoom in on your current finances: your income, expenses, credit card debt, and current savings. Understanding your cash flow will help you pinpoint exactly how much you can set aside each week, month, quarter, or year for college savings. Keep in mind that saving for your child’s future shouldn’t jeopardize your own. Assess your current retirement saving accounts to effectively save for your child's education while ensuring your own financial security.
The sooner you start exploring how to save for kids’ college, the more time you’ll have to modify your approach — and the more time your investments will have to grow. Here are a few money saving tips for families to get started.
A college fund doesn’t come out of thin air. Instead, families saving for their child’s college education will have to find funding within their existing budgets. Creating a budget that earmarks a dedicated amount for college savings is an effective way to ensure you're consistently putting money toward your goal.
To start, determine both your regular cash flow and how much you need to save each month to meet your savings goal. Then round up your expenses while figuring out where budgeting for college fits in. This might involve some lifestyle adjustments, like cutting back on discretionary spending or finding additional sources of income. Once you’ve found room in your budget, consider setting up automatic transfers to your college savings account to ensure your goal is consistently funded.
You don’t have to save for college on your own. Depending on your circumstances, you may want to encourage family members to contribute to your child’s college fund whenever possible. In lieu of other gifts at the holidays or for birthdays, suggest that friends and relatives donate to a savings account or pitch into a 529 plan (which we’ll discuss below.) In addition to growing your savings faster, this strategy involves your family in your child’s future educational success.
You can save for your child’s college by kicking cash into a savings account whenever possible. Or, you can leverage one of the many savings vehicles specifically designed to help families save for college more efficiently.
One way to grow your child’s college fund is through a 529 savings plan: a tax-advantaged savings account solely for education expenses. Your annual contributions up to $18,000 (or $90,000 for a five-year lump sum donation) grow tax-free, and withdrawals are also tax-free when applied toward eligible education expenses.5 Families can have more than one 529 savings plan, meaning a relative can set up their own plan to contribute to your child’s college––reaping the tax benefits even if they only contribute a few hundred dollars a year.
Coverdell Education Savings Accounts, or ESAs, offer another tax-advantaged way for families to save for their child’s higher education. However, there are some distinct differences between an ESA and a 529 plan:
Custodial accounts offer another method of smart saving for college. The two primary account types, Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, allow parents or guardians to transfer assets to a beneficiary while maintaining account oversight until they reach adulthood. UGMAs are similar to an ESA in that they allow for investing in stocks, bonds, or mutual funds, while UTMAs provide more flexibility: allowing for these assets in addition to real estate, collectibles, and even intellectual property.
529 plans, ESAs, and custodial accounts like UGMAs and UTMAs make it easier for parents and family members to save for a child’s college, but only some of these strategies come with tax benefits.
The benefits of 529 plans give them a clear leg up over most other saving strategies. Any contributions to a 529 plan grow tax-free, and eligible withdrawals –– those earmarked for educational expenses –– can also be made without a tax obligation. What’s more: certain states may offer additional tax deductions or exemptions on contributions.7
Coverdell ESAs, too, offer clear tax benefits. Like 529 plans, cash grows tax-free in an ESA and qualified withdrawals are also free from any tax burden. But even the simplest college saving tools, like saving bonds, can grow substantially with time without incurring tax penalties. For a full understanding of your tax-advantaged college saving options, consult with a professional.
When exploring how to save for kids’ college, there are more passive routes and there are active routes. Saving skews more passive, while investing allows you to take a hands-on approach to growing your child’s college fund.
Investing in individual stocks poses the greatest risk but can also offer the greatest reward. Stocks can be volatile compared to other investment products –– prices go up and down with the public’s faith in them –– and navigating the market on your own can be a challenge. But if you have a longer time horizon until your child starts college, you may consider allocating a portion of your college savings to stocks (and a larger portion of your time to figuring out how they work.)
You don’t have to be a day trader to reap the benefits of investing. Mutual funds and bonds are simple investment vehicles that provide a balanced approach to investing for college. Mutual funds do so by offering diversification: allowing investors to pool their money to purchase a number of stocks, bonds, and securities, with upwards of double-digit annual returns. Bonds, on the other hand, tend to mature slower, providing a lower-risk investment opportunity that can still be a great college-funding option.
Saving early and investing wisely can help you fund the education your child deserves, but these tools alone may not be enough. Fortunately, there are solutions in place to help you bridge the gap in college funding.
A student loan might seem like a last-ditch effort to fund a college education, but for 43 million Americans and counting, it’s become the norm.8 But while experts agree that student loan debt should be used cautiously and sparingly, it can be a necessary part of funding at least part of a college education. Federal student loans, especially, can be helpful, as they generally offer lower interest rates and more accommodating repayment options compared to private loans. In addition to saving early and diversifying your investments, complete the Free Application for Federal Student Aid (FAFSA) to understand and secure your child’s aid eligibility.
While student loans must be repaid, scholarships and grants offer the benefit of financial aid without the requirement of repayment. This aid can come from just about anywhere: federal and state governments, private groups, alumni, and even the colleges themselves. By conducting thorough research with your child and investing time into the application process, you might find scholarships and grants to be an integral piece of your child’s college fund.
When it comes to funding your child’s college education, the secret may be right under your nose –– or, rather, right over your head. With Truehold’s sell and stay transaction, you can access your home equity to help finance your child’s dream without having to leave your cherished abode. And when you sell your home and become a renter, we'll cover property tax, property insurance, and essential repairs. This way, you have more time to cheer on your future grad.
Homeowners across the country have leveraged Truehold to access their home equity and fund dreams of all sizes. To learn more about funding yours and your child’s dreams, and to get an offer on your home within 48 hours, connect with one of our representatives today.
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