So you want to be proactive and save for college. Maybe you’re a high school student who wants to build up a college fund for yourself, or maybe you’re a parent or family member who wants to save for a young loved one. No matter your situation, you’re taking a proactive step in making college a little bit more affordable.
In this post, I’ll discuss the things you need to know in order to build, keep, and grow college savings. We'll discuss the five best ways to save for college to lower student debt on graduation and take a load off your mind.
First, though, I'll talk about the question you should be considering before you implement your savings plan: how much should you be putting away in the first place? Read on to find out!
How Much Should You Save?
As you might imagine, the answer to this question will be different for everyone. I'll talk about the costs of college, how they're expected to change, and some common savings goals before moving into the nitty-gritty of savings calculations.
College is already pretty expensive, with costs varying based on factors like school type, financial need, and academic merit. On average, it costs about $45,000 to attend a private US college for one year, while the cost of attendance at an in-state public school averages about $23,000. You can read more about estimating your own expenses with our college cost guide.
Although it's currently pricey to get a college education, expenses are only increasing year by year. If prices increase at a rate of 5% annually, the total cost of 4 years of college in 18 years could be:
- $237,000 at an in-state public university
- $464,000 at a private college or university
These sticker prices are definitely intimidating, but it's important to keep in mind that most families aren't shelling out those total amounts in cash in order to pay for school. As of a few years ago, this was the average percentage breakdown of how families paid for college (according to the College Board):
- 5% contributions from relatives and friends
- 9% parent borrowing, like with a private or PLUS loan
- 11% student income and savings
- 18% student borrowing, like with a Direct loan or Perkins loan
- 27% parent income and savings
- 30% grants and scholarships like the Pell Grant
Hopefully, this breakdown helps assuage any fears you may have about the process of paying for college. Although it isn't difficult to come up with a current net price estimate of college expenses, it may be challenging to do this for students who will attend college in 5, 10, or 15 years. According to one survey, most parents say they hope to pay at least half of their children's college expenses; in the following examples, I'll work with these figures and savings goals to show you how much, exactly, you should stash for the future.
Maybe the most tedious part of saving for college: figuring out what you're comfortable putting away.
Ultimately, the amount you decide to save will depend on your family income and expenses. You don’t have to have four years’ worth of expenses (tuition, room, board, fees, etc.) saved up by the time your student’s 18, especially if your family has a lower income and you expect to qualify for financial aid like the Pell Grant. It’s hard to predict what sort of aid you will get that far in the future, but you can start with an estimate of what your family will have to pay out of pocket given current costs.
Once you've come to a savings goal - let's say your full expected family contribution (net price) for convenience's sake - you can figure out how much to put away every pay period. Just divide your total expected contribution for four years of college by the number of pay periods until your child leaves for school.
Here's a basic savings formula for how much you should save per month, assuming your money wouldn't be earning any gains or interest:
Monthly savings = Total savings goal ÷ (Years until college x 12)
Let's see how this looks in action:
If you have a newborn baby, you'll have 18 years to save for college. You have the advantage of time on your side, but you also know that college costs will rise significantly over the next couple of decades. You estimate that the cost of attendance at a private college will cost about $460,000 by the time your child goes to school, and you want to save half that amount: $230,000.
- If you stashed your cash in a 0% interest account, you could save $230,000 in 18 years by setting aside $1065 a month
- If you stashed your money in an account with an average annual rate of return of 6%, you could save $230,000 in 18 years by setting aside $500 a month
$500 a month is a lot more reasonable than $1065 a month, but it still may not be within your budget. What happens if you save less per month, over 18 years, in that same 6% yield account?
- If you save $100 a month, you would have $47,000 in 18 years
- If you save $250 a month, you would have $166,000 in 18 years
Ultimately, any amount that you choose to put away will help empower your child (or yourself) to pay for college in the future. As you can see; however, you can grow your money much more effectively if you save early, save often, and save in an account with a high rate of return.
Ways to Build Funds
To students and parents alike: the earlier you start building a college fund, the better.
Strategies for funding college will vary based on who, exactly, is trying to save for school. Whether you're a parent or a student, you can start working on a funding source.
It’s never too early to start a college fund for your future student. In fact, the earlier you start, the easier it will be to save a significant amount. Perhaps the best way to save is to set aside a small percentage of your income every pay period. You can withhold it and put it aside in a big chunk at the end of the year. Alternatively, you can have a set amount or percentage automatically deposited in a separate account every pay period.
The amount you choose to set aside will obviously depend on your income and family expenses.
There are many different ways for you to start building up a college fund for yourself. The more you save now, the less you may have to worry about your tuition bills or student loan payments later.
You can start working in many states at 14 or 15, which potentially gives you 3-4 years to build up some savings for college. This isn’t the right choice for everybody - you shouldn’t put a job ahead of your studies or extracurricular activities - but it can be a good way to start putting money away for the future.
Assume that you'll start off working part-time and at federal minimum wage - not super appealing, I know, but that's the unfortunate reality of getting a job as a teen. If you work full-time for two months during the summer (40 hours per week at $7.25 per hour), you could earn up to $2,320 before taxes. Do this for three summers during high school, and you could earn almost $7,000.
That's a significant chunk of money, but it requires a lot of time and energy on your part. Starting early; however, could provide opportunities for advancement (i.e. salary raises) and work experience that may help you get a more appealing job once you're in college. Check out our article talking about when you should (or shouldn't) get a job as a student.
Family Member Contributions
Some students may be fortunate enough to have family members who are willing to help with college expenses. If you’re still in high school but want to start building your college fund, ask family members for contributions in lieu of traditional gifts for birthdays or holidays.
You don’t have to wait until you’re accepted to college to start applying for scholarships. There are a lot of programs out there open to high school students, and some are open to even younger kids. To start your scholarship search, check out our posts on the top scholarship programs for high school juniors and high school seniors.
Spend a few minutes researching scholarships in your area that may be eligible for. Even small scholarships add up if you’re diligent about applying broadly.
Where to Keep Your Money
Money may not grow on trees, but that doesn't mean it can't grow.
Now that you have a plan for bringing in college money, you’ll need a plan for saving in a smart way. If you let your money just sit in a checking account or a low-interest savings account, you could be losing money due to inflation in the long run. Don’t let all your hard work go to waste!
There’s no one right savings plan for everyone, but there are a lot of different options available, each with its own pros and cons. I’ll present them all here so you can pick one or more that may work for you.
You can open a savings account in a matter of minutes at any bank. If you're looking for something a little more specialized, check out Coverdell Education Savings Accounts - they're custodial accounts that are meant specifically for education costs.
If you put your money in a savings account, it'll be easily accessible and very liquid. It's not difficult to find free accounts with no fees. Your money will grow, particularly if you find a high-interest account. Finally, savings accounts are very flexible, meaning anyone can open an account to use for any other person's education.
It can be tempting to dip into college savings if you have easy access to it. Any interest gains are taxable, but that may not matter too much at the moment because interest rates are so low - you probably won't be gaining much from interest.
529 plans are education-specific investment accounts - there are many different types of plans out there, so it might take a bit of research to find one that's a good fit.
Many 529 plans offer serious tax benefits: when used to cover educational expenses, any investment gains aren't taxed. Any adult can open an account and name any other individual as beneficiary, making the plans very flexible. There's a penalty for dipping into the account for non-education expenses, which hopefully leads to success in reaching savings goals. Finally, there are high lifetime contribution maximums (this depends on the state, but the maximums vary from 200k-400k).
If there's any sort of emergency and you need access to funds you've stashed in a 529 plan, you'll be charged a hefty penalty. The plans themselves often come with fees or other charges. Finally, because 529 plans are custodial investment accounts, they're not viable options for teens who want to save for college themselves.
Other Investment Accounts
There are other ways to invest college funds in the market besides 529 plans, including brokerage accounts and IRAs. Again, there are a lot of different options out there, so the most important thing is finding an account that works best for your savings goals.
There are a lot of investment account options out there, so you have a lot of control in how you invest your money. Depending on the type of account you choose, your funds should also be more easily accessible than if they were in a 529 plan, which means you wouldn't have to pay a penalty for using the money for non-educational expenses.
Choosing and managing an investment account takes more work and initiative than just sticking your funds in a savings account. Any gains from an investment account without the benefits of a 529 will be subject to tax, which you may have to pay on top of account fees. You also have to be 18 to open an investment account, meaning teens can't save for college this way (at least not on their own). Finally, some investment accounts can be very volatile, which subjects your savings to quite a bit of risk.
A CD is another type of savings account - you receive a certificate when you deposit your money for a specific length of time, at a specific interest rate. You can get your money + interest rate when your CD “matures,” after the designated time period ends.
Because your money isn't invested in the market, you don't have to worry about your savings losing value. CDs have better rates of return than many savings accounts when you choose a long-term CD, making them good options for parents with young kids.
CDs are more conservative options than most investment accounts, and as such, they tend to result in lower rates of return over the long term. In reality, the rates of return barely keep up with inflation. Gains are subject to tax. Finally, because long-term CDs keep your money locked in for extended periods, they're not good options for students heading off to college in the near future.
"Trust" is a pretty broad term, encompassing many different things. Essentially, a trust is a fund made up of different assets that are held and managed by someone (a trustee) for someone else (a beneficiary). It's possible to open a trust for the purpose of covering college expenses.
You can use trusts to minimize estate taxes (if you have to worry about that), get professional management of funds, and have total control over money if you’re saving it for a minor.
To open a trust, you generally need a pretty large lump sum - you can't just slowly contribute over time. They're also expensive to maintain and manage. Ultimately, they're probably best for wealthy families who already have trusts in the works for children or other beneficiaries.
Overwhelmed By These Savings Strategies?
This info should hopefully keep you grounded.
Whether your child is heading off to college next year or 18 years from now, the thought of saving up enough money can be pretty daunting. This is a lot of information to take in, so here's a breakdown of simple steps you can take to get started with a successful college savings plan:
- You don't have to orchestrate some complicated strategy all at once in order to save for college. If you want to start saving but don't have time at the moment to research different savings or investment accounts, it's okay to put that stuff on the back burner. Just spend a few minutes opening a simple savings account at your current banking institution - that's all you have to do to open a dedicated college fund. Once you have more time, you can start looking at savings plans that will help you grow your money most effectively.
- You don't have to throw all your extra funds into college savings from Day 1. Managing a household budget is a delicate balancing act for many families. If you are ready to start a college savings plan, begin by putting aside 5% of your income. If that's too much (or too little), you can adjust as necessary. Remember, you can always contribute larger lump sums if you have extra funds available.
- If you don't meet some arbitrary savings goal, that doesn't mean you've failed. Few US families can afford to cover all college expenses upfront, but any amount that you save up can help cut down on things like student debt and even stress over making payments. Fewer than half of all families with kids sock money away for college - you're already at an advantage by setting up a dedicated college fund.
Although it's important to have a college fund to cover large educational expenses, your personal savings are not the only way to pay for college costs. Federal and institutional financial aid may cover a large fraction of these expenses, but only if you submit the right applications at the right time. Check out our guide to applying for financial aid for more information.
Did you know that some schools offer much better financial aid packages than others? If you want an education for a bargain, learn more about the 27 colleges with the best financial aid programs.
Finally, you may be interested in private scholarship programs to help bridge the gap between what you owe and what you can afford. Read more about the top scholarships out there for high school juniors and high school seniors.
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Francesca graduated magna cum laude from Harvard and scored in the 99th percentile on the SATs. She's worked with many students on SAT prep and college counseling, and loves helping students capitalize on their strengths.