It's no secret that college is expensive—the average cost of tuition and fees at a private four-year university now tops $35,000 per year. That figure doesn't even include the cost of room and board, books and other expenses. Deciding how much to save for college is a constant debate for many students and parents.
The answer depends on a number of factors, including the type of school, the state you live in and your family's financial situation. However, there are a few general guidelines you can follow to help
The average cost of college in America
Over the last 50 years, college costs have risen at
2021-2022 college costs
- Public four-year in-state. $10,740
- Public four-year out-of-state. $27,560
- Private nonprofit four-year. $38,070
When you add in other costs associated with college, such as fees, room, board and books, the numbers are closer to this:
- Public four-year in-state. $27,330
- Public four-year out-of-state. $44,150
- Private nonprofit four-year. $55,800
In other words, if you were to pay for your child to go to college for four years starting today, and you also plan to cover their living expenses, transportation and food expenses, here is the total anticipated cost over four years:
- Public four-year in-state $109,320
- Public four-year out-of-state. $176,600
- Private nonprofit four-year. $223,200
What is the best way to save for college?
For most people, saving for their children's college education is a financial priority. However, there is
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses. 529 plans are sponsored by states, state agencies, or educational institutions and are managed by investment companies. Contributions to a 529 plan are not deductible from federal income taxes, but they may be deductible from state taxes.
Earnings in the account grow tax-deferred as long as they are used for qualified education expenses. These expenses include tuition, fees, books, supplies, equipment and certain room and board expenses. Withdrawals used for other purposes may be subject to ordinary income taxes and a 10% federal penalty tax.
There are two types of 529 plans: prepaid tuition plans and savings plans.
Prepaid tuition plans
With a prepaid tuition plan, you purchase credits or units at participating colleges and universities for future tuition and fees at today's prices. When your child is ready to attend college, the units or credits are applied to their account to cover a portion or all of the costs.
A college savings plan is an investment account that allows you to save money for future education expenses. The account owner—typically the parent or grandparent—chooses how the money will be invested, and the account grows tax-deferred. Withdrawals used for qualified education expenses are tax-free.
A Coverdell Education Savings Account (ESA) is a tax-advantaged savings account that can be used to cover qualified education expenses for a designated beneficiary, including K-12 tuition and fees as well as college expenses. Contributions to a Coverdell ESA are not deductible from federal income taxes, but the earnings in the account grow tax-deferred, and withdrawals used for qualified education expenses are likewise tax-free.
There is an annual contribution limit of $2,000 per beneficiary, and contributions must cease when the beneficiary reaches age 30.
A Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA) account is a custodial account that can be used to save and invest money for a child's future. The account is owned by the child, but it is managed by a custodian such as a family member until the child reaches the age of majority, which is typically 18 or 21 depending on the state.
Contributions to an UGMA/UTMA account are considered gifts, and there is an annual gift tax exclusion of $16,000 per donor per beneficiary in 2022. This means that you can contribute up to $16,000 to an UGMA/UTMA account for each child in 2022 without incurring any gift tax liability.
The earnings in an UGMA/UTMA account are taxed at the child's tax rate unless the account exceeds certain amounts. Withdrawals from the account can be used for any purpose, but they may be subject to income taxes and a penalty if used for nonqualified expenses.
Qualified expenses include most things used for the benefit of the child. Nonqualified withdrawals may be subject to ordinary income taxes and a federal penalty tax.
Student loans are meant specifically for students to help pay for their education. They can be either private or federal: Federal student loans are made by the government and typically have lower interest rates compared with private student loans.
There are four types of federal student loans:
- Direct subsidized loans. These are for students with financial need
- Direct unsubsidized loans. Unsubsidized loans target students without financial need
- Direct PLUS loans. This option is meant for graduate or professional students as well as parents of dependent undergraduate students
- Direct consolidation loans. This allows you to combine all your eligible federal student loans into a single loan with one monthly payment.
You can apply for federal student loans at
It's possible to get private student loans via banks, credit unions and other private lenders. Private loans tend to carry higher interest rates than federal student loans. Federal student loans also typically have more favorable repayment terms. When you take out a student loan, you should always exhaust your federal student loan options before turning to private ones.
Traditionally a retirement savings account, Roth IRAs are funded with after-tax dollars, and the contributions can be withdrawn at any time for any reason. So, if your student decides not to attend college, you can use the money for retirement without penalty.
Financial assistance from family members
One common way to pay for college is to receive money from family members. This money can come in the form of gifts, loans, or investment income. Gifts are often used to pay for tuition or other expenses related to attending college. Loans may be taken out by the student or the family member, and the loan repayments can be used to help pay for college expenses.
It is important to remember that when using money from family members to pay for college, you should speak openly about their expectations—whether or not it's a gift or if your child needs to pay it back as well as whether they expect your child to meet certain grade requirements in order to receive financial help.
Community college is often more affordable than a traditional university. These schools offer a wide variety of programs, including two-year degree programs that can save students thousands of dollars in tuition costs whether they choose to transfer to a four-year university afterward or not. In addition, community colleges often have partnerships with local businesses and industry leaders that can provide students with internship and job opportunities.
Student work opportunities
Many colleges and universities offer student work opportunities that can help students pay for their education. These work opportunities can come in the form of on-campus jobs such as working in the library or cafeteria or off-campus jobs such as retail.
Scholarships and grants
One of the best ways to pay for college is to receive scholarships and grants—this financial aid does not need to be repaid. Scholarships are usually awarded for academic merit, while grants are often awarded based on financial need.
Some combination of the above
Again, there is no one right way to pay for college. In many cases, families will use a combination of the above options in order to pay for school.
You may be able to help your child attend college by paying for a portion of their schooling but supplementing the costs by asking them to apply for scholarships, encouraging them to work and using financial gifts from family.
How much to save for college from birth
It's never too early to start saving for your child's future education. Starting with as low as $50 per month for your child at birth can enable them to have a wide range of options, from in-state public schools to private schools. By taking advantage of time, compounding interest and tax-advantaged accounts, you can help make college more affordable for your family.
To start planning for your child's college education, explore the
Many college websites offer net price calculators that can give you an idea of what college costs at various institutions. Discuss your goals with your immediate and extended family to see if they're interested in helping contribute to your children's college education. This will help you determine your goals for your child and decide whether or not paying for the entirety of the education is your priority.
Lastly, don't go through this process alone. Consult a