How much student loan debt do you think the average college student racks up by the time they cross the graduation stage? $5,000? $10,000? Nope, not even close. The average college graduate’s student loan debt is a whopping $39,487.1 And that’s just the average. Whew.
And when you multiply this amount by millions of students, the overall student loan debt in America is $1.58 trillion.2 Yeah, that’s trillion with a T.
At this rate, college graduates will be lucky to have their student loans paid off before their kids start college. As a parent, you’re probably thinking there must be a better way. And there is! You can start saving for college by opening a college fund. It’s not easy, but with focus, hard work and careful planning, it’s possible to save enough so your child can go through college debt-free.
How Much Should You Save for College?
The first step to starting a college fund is calculating how much you need to save for college. If your kid is a junior in high school, for example, you’ll need to save more money (and faster) than if you start saving when your kid is in first grade. And you’ll need to have an idea of where your child will go to school, like an in-state community college or an Ivy League university.
Choosing a public versus private school, for example, has a huge impact on how much college costs (and this has less impact on the quality of their education or future career than you might think). Here’s a good range of school costs so you can plan how much is enough to save for college, according to stats from the 2022–2023 school year:3
- Public, Two-Year College: $19,230
- Public, Four-Year, In-State College: $27,940
- Public, Four-Year, Out-of-State College: $45,240
- Private, Four-Year College: $57,570
(Keep in mind—these numbers don’t take inflation into account. So, 18 years from now, the rates will likely be much higher.)
When Should You Start Saving for College?
As soon as possible!
Starting a college fund for your kids is a great goal, but it’s not the only goal. People often think parents are responsible for paying for college for their kids, but that’s not always possible. And the reality is, your kids can help pay for college by earning grants and scholarships or working a part-time job.
So, before you jump into saving for college for your kids, you need to set up your future for success. And don’t worry, this isn’t selfish—it’s smart! Here’s what I recommend:
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except the house) using the debt snowball.
- Save 3–6 months of expenses in a fully funded emergency fund.
- Invest 15% of your household income in retirement (for instance, through your employer-sponsored retirement plan, like a 401(k) or a Roth IRA).
- Sign up for a Financial Peace University class to learn how to pay off debt and save money for the future.
How to Start a College Fund and Types of College Funds
Once you have these five money steps taken care of in your own life, and once you have an idea of what your child’s chosen school will cost, I recommend saving for college using a tax-favored plan. Starting a college fund is simple, but you’ll want to learn which fund is the right choice for you and your child’s savings goals.
Education Savings Account (ESA) or Education IRA
An ESA works a lot like a Roth IRA, except it’s for education expenses. It allows you to invest up to $2,000 (after tax) per year, per child. Plus, it grows tax-free! If you put away $2,000 a year starting when your child is born, by the time they turn 18, you would have invested $36,000. It’s hard to say exactly what the rate of growth is with an ESA because it varies based on the investments in the account. But if you invest in good growth stock mutual funds and get an average return of 10–12%, that $36,000 could grow to around $112,000 by the time your child starts school. Congratulations, you more than tripled your investment, and now Junior doesn’t have to worry about paying for tuition!
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I like the ESA because it’s likely a much higher rate of return than you’d get in a regular savings account—and you won’t have to pay taxes when you withdraw the money to pay for education expenses. An ESA isn’t just for college tuition either. It can be used for K-12 private school tuition, vocational school or things like textbooks, school supplies or tutoring. And if your child doesn’t end up needing the money, you can transfer it to a sibling so they can use it for their school expenses.
Why I Like It:
- There’s a variety of investment options.
- Your money grows tax-free.
- There’s a higher rate of return than regular savings accounts.
Why I Don’t Like It:
- Contributions are limited to $2,000 per year.
- You must be within the income limit to qualify.
- The amount must be used by the beneficiary by age 30.
529 Plan
If you want to save more than $2,000 a year for your children’s college education, or if you don’t meet the income limits for an ESA, a 529 plan could be a better option. But be careful—some 529 plans are no good. Look for a savings plan that allows you to choose which funds you invest in. These are usually called “flexible” plans.
I wouldn’t use a prepaid 529 plan that freezes your tuition savings rate or automatically changes your investments based on the age of your child. Stay away from so-called “fixed” or “life phase” plans. You want to stay in control of the mutual funds at all times.
Like the ESA, the 529 can be used for other education expenses, like K-12 tuition, vocational school or required college textbooks. Some 529 plans also give you the option to move the funds from one family member to another, which is helpful if the child you’ve been saving money for decides not to go to college—but some 529 plans don’t allow this.
Why I Like It:
- Contribution rates are higher (this varies by state, but generally you can contribute up to $300,000).
- Most of the time, there aren’t any income limits or restrictions based on age.
- Your money grows tax-free.
Why I Don’t Like It:
- Restrictions may apply if you choose to transfer the funds to another child.
- If one person contributes more than $17,000 to the 529 in 2023, that money is subject to a gift tax.4
UTMA or UGMA
If you’ve already done an ESA and a 529, or if you don’t qualify for an ESA, then and only then should you look into a Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA). This plan is different from ESAs and 529 Plans because it’s not just for saving for college.
The account is in the child’s name but controlled by a parent or guardian until the child reaches either age 18 or 21 (this age varies by state, but it’s generally age 18 for UGMA and age 21 for UTMA). Once the child reaches the set age, they’ll be able to control the account to use any way they choose. This means you’re basically opening up a mutual fund in your child’s name. So, while you can use a UTMA or UGMA to save for college and invest in your child’s future with reduced taxes, your kid ultimately gets to choose how the money is spent. There are no limits to the amount of gift money you contribute to these funds, but anything above $17,000 per year (or $34,000 for a married couple) will have a federal gift tax.
Why I Like It:
- Funds can be used for more than just college expenses.
- There are tax advantages for the contributor.
Why I Don’t Like It:
- The beneficiary can use money however they choose once of legal age (aka they could pay for a sports car instead of college).
- The beneficiary can’t be changed after selected.
10 Simple College Savings Tips for Students
Many of us want our kids to pursue a degree. But college is a privilege—not a requirement. And to be honest, it might not be worth it for every child. But if your child does choose to go to college, remember that it’s not necessarily your responsibility to pay for it. It’s totally okay (and even empowering) for your child to take some ownership in their education. Even though your child is a full-time student now, there’s no reason they can’t start building up their own savings fund. At the very least, doing this will help establish healthy money habits they’ll carry into the future.
Here are some great college savings tips to help them get started:
1. Apply for scholarships.
Scholarships are free money for college that your child doesn’t have to pay back (that’s what you want). If they excel in athletics, academics or extracurricular activities, they should use those abilities to their advantage and try to get rewarded for it. Encourage your child to apply for any scholarship they’re eligible for. Even the small scholarship awards add up fast!
2. Apply for aid.
Everyone who wants to go to college should fill out the Free Application for Federal Student Aid (FAFSA). It’s a form schools use to figure out how much money they can offer the student. The FAFSA covers things like federal grants, work-study programs, state aid and school aid—all different bundles of free money! (Remember, that’s what you want.) But beware: The FAFSA also shows how much your student can borrow in student loans, which is a terrible idea. So, when the award letter arrives, read the fine print to make sure it’s a scholarship or grant—not a student loan.
3. Take AP classes.
Advanced Placement (AP) classes give high school students the opportunity to earn college credits while they’re still in high school. Every AP class taken in high school is one less class you’ll need to pay for in college. Hallelujah! Tell your child to talk to their academic counselor for more information.
4. Get a job.
Whether they take on a full-time gig during the summer or a part-time job during the school year, your child will be able to save money for college and gain work experience to put on their resumé.
5. Open a savings account.
If your student is serious about building up their college savings, they’ll need a safe place to keep all that money. Most banks offer savings accounts specifically for students, which usually means waived monthly maintenance fees and no minimum balance requirements. If your child is under 18, you’ll need to be the joint account holder.
6. Save money instead of spending it.
When your child gets birthday money or an allowance, suggest they put it right into their savings account so they aren’t tempted to spend it.
7. Never use student loans.
Student loans aren’t a last option—they’re not an option at all. Student loans may seem like a quick fix, but they’re a nightmare that sends college graduates out into the world anchored in debt. If your child can’t pay cash when tuition is due, then it might not be the right time to be in college. Instead, they should take some time off school to work and save more money.
8. Choose a cheaper school.
I know Ivy League might be the dream, but going to an in-state school can offer the same degree programs at a huge fraction of the cost. Plus, if your kid stays local, that cuts down on moving costs, out-of-state tuition, and travel expenses to visit family and friends.
9. Let them live at home.
Having your child live at home and commute as a college student can save thousands of dollars a year on room and board expenses. Plus, your child can ditch the campus meal plan and save money by cooking at home or joining family dinners instead. That’s a win in my book!
10. Look for tuition reimbursement at work.
Some companies offer tuition reimbursement for their college student employees. If your child is applying for part-time jobs, help them filter their job search to include companies that offer a tuition reimbursement benefit. Any little bit helps, plus they’ll get professional experience to add to their resumé.
It’s Time to Get Serious About Saving for College
It’s never too early to start thinking about a college savings plan. Whether your child is a teenager or toddler, the best time to start a college fund is now (after you’ve paid off debt, saved an emergency fund, and started investing 15% of your income in retirement accounts).
Making the right plan for your children’s future starts with understanding all of your investment options. Connect with a qualified investment professional for free through SmartVestor. These are people we trust to take care of you and your child’s college investment.
Want to learn more about how to go to school without loans? Debt-Free Degree is the book all college-bound students—and their parents—need to read to be prepared for this next chapter. Grab a copy today or start reading for free to get plenty of tips on going to college debt-free!
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About the author
Kristina Ellis