Saving for college in some capacity—whether its 15 years in advance or while you’re a college student—is worth it. Money saved now means less money you’ll need to borrow and payback in the future.
Continue reading to learn about several long-term and short-term college saving strategies and programs for parents and students.
Long-Term Saving for College—10 to 15 years Out
Saving for college ahead of time can make financing your child’s or grandchild’s education less stressful.
If you have 10 or 15 years until your loved one starts college, try saving for college with some of these long-term saving strategies.
529 Savings Plan
A 529 Plan lets you put money aside in a tax-free investment account for education savings. You can use the funds to cover college tuition, fees, room, board, and other qualifying educational expenses like a laptop or books. 529 Plans also let you save money to fund elementary and secondary school expenses.
529 savings plans operate like a regular investment account but offer several tax benefits:
- Contributions are deductible on your state income tax in select states
- You don’t pay taxes on any money withdrawn for qualified education expenses*
- You can contribute up to $14,000 per year in a beneficiary’s account without triggering the gift tax in some states
*This tax benefit applies to all states
Each state runs at least one 529 Plan program. To view information about your state’s plan, visit your state’s website. While it’s possible to enroll in a program in another state, it’s usually most beneficial to stick with your state-sponsored plan.
Prepaid College Savings Plans
Colleges continually raise tuition prices each year. This makes it difficult to estimate how much you need to save. Several states and institutions sponsor prepaid college savings plans that lock in the college plan prices and prepay tuition (and sometimes room and board).
With a prepaid college savings plan, payments are based on your child’s age and how many years of college you want to pay for. These plans differ from a traditional 529 savings plan because you know exactly how much you need to save. Plus, the funds can only go toward tuition and room and board depending on the plan you choose.
Want more info on prepaid college savings plans? Learn about oldest prepaid college plan in the country here.
Saving for College Tip: A lot of families use a prepaid college savings plan to cover tuition, room, and board costs and use a 529 savings plan to save for books, supplies, and a computer.
High-Yield Savings Account
If your savings account isn’t earning you money, it should be. Saving for college can be as simple as opening a high-yield savings account. These accounts offer 1.8% or higher APY and keep your savings accessible.
Look at how a high-yield savings account could work for your family:
You open a savings account with a 2.0% APY and an initial deposit of $5,000. Your child is three, so you plan to add $20 each month until they start college at age 18. After 15 years, the account balance will equal $10,917.67–$8,600 contributed by you and $2,317.67 earned as interest.
Sure, $10,917.67 won’t cover the full cost of college, but it means $10,917.67 less that your child needs to take out as loans. The money can also help cover expenses like plane tickets to and from school, books, or other supplies.
Just know that if you choose this saving strategy, you must pay taxes on the interest. The amount also counts toward the parent contribution part of the FAFSA—meaning it could affect your child’s status for need-based financial aid.
Roth IRAS
A tax-advantaged Roth IRA works great as both a retirement account and an educational savings account. After-tax contributions grow tax-free, making it easier to maximize your savings. Plus, you choose where to invest the money—stocks, bonds, mutual funds, etc. Best of all, money withdrawn to cover qualified education expenses is penalty-free.
If your child decides not to attend college, no worries. You can keep the money in the Roth IRA and continue building up your retirement funds.
Since you can only contribute up to $6,000 annually depending on your age, it’s a good idea to use a Roth IRA along with another long-term saving method.
Short-Term Saving for College Tips
It’s never too late to start saving for college. Whether college is just a couple years away or you’re currently enrolled, there’s a lot you can do to build up your savings.
Reduce Monthly Spending
Want to save more? Create a budget and then spend less.
First, go through your bank account or use an online financial planning tool like Mint by Intuit to see where your money goes each month. Identify which expenses you can cut back on and which are essentials.
Expenses to cut back on might include:
- Bank fees—switch to a fee-free bank
- Eating out
- Unused or unnecessary monthly subscriptions
- Coffee from a coffee shop
- Buying books, movies, and music—check these items out at the library instead
- Clothing
Next, create a weekly, bi-weekly, or monthly budget for yourself. Break down essentials into categories like grocery, rent, utilities, medical, etc. to keep yourself from overspending. Plan to budget at least 20% for savings and 80% for essentials. If you don’t have many essential expenses, bump up the savings percentage as high as you’re comfortable with.
Finally, to maximize savings, put the money saved into a high-yield savings account.
Start a Side Job to Earn Extra Money
It’s easier than ever for high school and college students to earn extra money during their free time. Mobile apps make it easy to find babysitting, dog walking, or food delivery clients. The internet makes it easy to sell your artwork, work remotely, and profit off vlogs and blogs.
Start a side job to earn extra cash for your college expenses like books, supplies, and transportation. See if any of these side hustles fit your skills and interests:
- Walk dogs
- Babysit
- Sell artwork/crafts on Etsy, Redbubble, and related sites
- Resell products on eBay, Facebook Marketplace, and Craigslist
- Freelance writing
- Monetize your YouTube channel, blog, or Instagram account
- Delivery driving
- Rideshare driving
- Tutor
- Sell stock photos
- Start a photography business
Apply for Scholarships
Scholarships make saving for college a breeze. You could win a competition, write an essay, or enter a contest and walk away with enough money for your first year of tuition. Throughout high school and college, spend time each month looking for and applying to scholarships.
Get the most out of your efforts by following these scholarship tips:
- Start searching and applying in 9th grade and don’t stop until you graduate college
- Look for scholarships posted on guidance office, library, or community center bulletin boards
- Ask your parents if their workplace offers scholarships
- Ask your boss if your employer offers scholarships
- Prioritize local, church-based, and school-sponsored scholarships
- Only apply to scholarships you 100% qualify for
- Tailor your resume, essay, and application responses to the sponsor’s goals
Final Thoughts on Saving for College
Saving for college is a process that requires careful thought. Do thorough research as you decide which options make sense for you and your family.
If you’re concerned with the tax implications of saving for college, reach out to your tax advisor. They can provide specific answers based on where you live and your financial situation.
If you’re concerned about how saving for college affects financial aid, read about how the expected family contribution is calculated. Doing so can help you estimate how your savings would affect your student’s financial aid package.
