How much to save for your kid's college and the best ways to save

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC Head of Financial Planning

As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.

With the rising costs of higher education, you may be concerned about saving enough for your kid's college education. Numbers from the Education Data Initiative suggest tuition costs have risen more than 9% over the past decade.

However, you have plenty of ways to save for a college education. These tips can help you start or continue your college savings strategy with confidence.

Factors that influence how much college will cost

Knowing how much to save for college starts with the type of college you expect your child to attend. Colleges range from two-year local community colleges and four-year public in-state universities to private four-year colleges throughout the country.

The type of school and state of residence will play a significant role in your tuition bill. Here are some additional factors to consider:

• Public vs. private schools. Public schools tend to have lower tuition costs than their private counterparts. Data from the College Board puts the 2023–24 average annual in-state tuition at four-year public colleges at $11,260; out-of-state tuition averages $29,150. If you have an eye on a private college, annual tuition averages $41,540.
• In-state vs. out-of-state. Using the figures above, it's not a wild leap to say that you could score significant tuition savings by choosing a public in-state school. However, private schools are state-of-residence agnostic, and all students pay the same rate.
• Number of years in school. The above tuition estimates cover only undergraduate degrees. If your child plans on earning an advanced degree or wants to attend a professional program such as medical school, graduate tuition rates tend to be higher than those of undergraduate.
• Other college expenses. From room and board to rent, campus fees and books, costs can add up. The total cost of attendance for students at four-year public in-state colleges per the College Board was $28,840 and $46,640 for out-of-state. For private four-year colleges, those costs rise to $60,420.
• Type of degree. Research from the nonprofit Education Next found that social science degrees tend to have a lower tuition cost than technology, science and preprofessional programs like nursing and medicine.

How much should I save for my kid's college education?

The actual amount you should save depends on your and your family’s financial situation. Here’s what you should consider when deciding on what number makes sense for you:

Review your current budget and set realistic goals. Take a look at your finances to determine how much you can afford to put away each month. Make sure to review this number at least once a year or any time you have a major shift in your income.

Consider what portion your kid’s college cost you’ll want to save for. Your goal doesn’t necessarily have to be to save for the full amount. Maybe aiming for one-third or one-half is more attainable.

Remember you’ll have other ways to pay. Your savings don’t have to be the only source to put toward tuition. Scholarships, grants, financial aid, loans, and your and your child’s income from working while in school may also help cover expenses.

Work with a financial planner. A financial planner will help you better determine the amount of savings that makes sense for you. They’ll also know which colleges savings account options are the best for your situation.

How to save and invest for a college education

The best way to save for your kid's college is the way — or ways — that make the most sense for you and your family. Luckily, plenty of account types are available. And no matter which account type best suits your goals, they all share a single benefit: the ability to grow your savings through the magic of compound interest.

A 529 plan is a special type of tax-advantaged investment account designed for college savings. Your savings could grow on a tax-deferred basis and funds withdrawn for qualified educational expenses are tax free. There are no restrictions on who can contribute to a 529 plan, and lifetime maximums vary by state. Since the 529 is an investment account, the account balance may not grow and could lose value. Some states offer tax deductions for resident contributions. Consult your tax advisors for details about your state.

A Coverdell education savings account is another tax-advantaged savings account specifically for educational expenses. The contribution maximum caps out at $2,000 annually. To be eligible for Coverdell savings for 2023–24, single filers must have a modified adjusted gross income (MAGI) of no more than $95,000 annually to make the full contribution; joint filers cannot exceed a MAGI of $190,000. Contributions are not tax deductible. However, you can withdraw money tax-free to pay for educational expenses. Additionally, a Coverdell has more flexible investment options, including individual securities like stocks.

Custodial accounts are those opened in a child's name, but that have an appointed adult custodian until the child reaches 18. At that time, the account transfers fully into the child's name. These accounts can hold a variety of asset types, including stocks, bonds and cash. There's no annual contribution limit, and there could be significant tax savings for full-time students when they begin to make withdrawals. A financial or tax advisor can help you explore the benefits.

High-yield savings accounts have no annual contribution limits and can often earn a competitive interest rate on savings. Interest will vary based on current market rates and is taxable in the year it's earned, which may be something to consider if you're in a higher tax bracket.

Similar to 529 plans, Roth IRAs let you save for college in a tax-advantaged way. These accounts are typically used for retirement, but withdrawals for qualified educational expenses avoid the 10% early withdrawal penalty. The upside? If your kid doesn't use all the money for tuition, you can use it for your retirement.

How do college savings accounts impact financial aid offers?

Are you wondering if how much you save for your kid’s college impacts how much financial aid they’ll receive? The answer is: It depends. Your college savings accounts are only one of many factors that impact the amount of financial aid a student is eligible for. Institutions consider the assets of both the student and their parents. College savings accounts are usually considered an asset of the parent, which carries less weight than the assets of the student.

For example, a 529 is typically assessed at 5.64% of a family’s expected contribution. Other factors include household income, family size, number of dependents in college and the cost of the institution. All of these are looked at to determine the amount of and type of financial aid a student may receive.

What if I haven't saved enough for college when it's time?

If your savings come up a bit short after your kid's financial aid package is finalized, don't stress. You still have options that can help you close the gap between what you've saved and what's needed for the bursar's office.

First, a wide variety of student loans are available beyond what your child received in their financial aid offer. Federal Direct PLUS loans are specifically for parents and have no origination fees or lending caps. The interest rate is higher than direct student loans, but can help with funding in a pinch. You can also explore private student loans, which offer flexible terms and a variety of repayment options, and can be taken out in the parent's or child's name. If you have excellent credit, you may even find you can get a lower interest rate with a private student loan than with a Federal Direct PLUS loan.

Next, consider scholarships. Before your child's senior year, explore various scholarship databases such as Scholarships.com or the U.S. Department of Labor's free scholarship search tool, CareerOneStop. The financial aid office at your child's school of choice can also help point you in the right direction for additional aid.

Finally, consider using your home equity. While this is more of a last-resort option, it could be a faster and easier way to borrow the cash you need to get your child's college journey started. Using a home equity line of credit (HELOC) or home equity loan, you'll use your home as collateral. A home equity line will let you draw what you need to pay your tuition bills up to your credit line. Once you repay the line, the funds are available to use again.

With a home equity loan, you'll need to borrow all that you'll need upfront. Rates on both can be highly competitive and often lower than unsecured loans. Yet with college costs rising, you could be paying the equivalent of a second mortgage, so it's important to consider this option closely before committing.

What's next on your college savings journey?

Now that you know how to determine how much to save for your kid's college, here's one parting thought: Paying for college isn't an all-or-nothing effort. You can use a combination of savings strategies — and if necessary, loans — to finance your child's educational goals. And by starting early and making savings a regular habit, you can build up an educational nest egg that will make you and your child feel confident as they begin their higher education.

Looking for more advice on how to afford higher education for your children? A Citizens Wealth Advisor can help. Follow the link below to request a call today.

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