Planning for your child’s higher education: How to save for college

How do you save for your child’s college when tuition costs are at an all-time high – and you’re trying to make ends meet now? Planning ahead is the answer. Whether your child is a toddler or already in high school, it’s never too early – or too late – to start preparing for college expenses. With a few smart strategies and a focused approach, you can ease some of the financial burden and set your child up for success.

This guide will walk you through practical steps, from how to save for college with an education savings account to understanding financial aid options and maximizing scholarships.

Set clear goals

Start by setting specific goals for your child's education. Whether they dream of attending a local university or studying abroad, having a clear goal can help you prepare effectively.

• Set the vision: Decide on the type of education that fits your child’s interests and goals, whether it’s a technical school, a private liberal arts college, or a state university.
• Estimate the costs: Research tuition fees, living expenses, and related costs, such as books and transportation.
• Create a timeline: Pinpoint when the funds will be needed by identifying your child’s expected start date. Work backward to ensure you have enough time to save and plan.

Start saving early

One of the best ways to prepare for college is to start saving as soon as possible. The earlier you begin, the more time you’ll have for your funds to grow and benefit from compound interest.

According to the U.S. News annual survey, the average tuition for the 2024-2025 school year was $43,505 for private colleges and $11,011 for in-state public colleges. Those costs will only go up, so getting a head start on saving is critical.

Don’t let those numbers scare you. Even paying ahead for a few semesters will be a big help when the time comes.

Tips for budgeting for college tuition

• Use an online college savings calculator to estimate how much you’ll need and set achievable savings goals.
• Schedule automatic monthly contributions to your savings plan to steadily grow your funds over time and stay on track with your financial goals.
• Encourage your child to save part of their allowance or earnings from part-time jobs.
• Consider cost-saving options such as community college for the first two years.

Understand college savings plans and tax benefits

A college savings account is a smart way to help your child graduate debt-free because the account helps your money grow instead of sitting idle. Account options vary, but you can choose a plan to meet your family’s needs and enjoy the tax advantages of saving for college.

A popular choice is the 529 plan. Sponsored by states, it helps you set aside funds while enjoying significant tax benefits.

Why 529 plans are valuable

• Contributions grow tax-free.
• Withdrawals are also tax-free when used for qualified education expenses, such as tuition, room, and board.
• Many states offer additional tax deductions for contributions.

An alternative to the 529 plan is the education savings account (ESA). Essentially, it’s a trust or custodial account designed to help you save and grow funds specifically for educational purposes.

The differences between a 529 plan and an ESA

While an ESA shares similarities with a 529 plan, there are notable restrictions and two key differences to consider:

• First, ESA contributions are capped at $2,000 per child annually, but 529 plans let you make higher contributions with virtually no cap.
• Second, ESAs offer greater flexibility in investment options. With an ESA, you can invest in a wide range of assets, including stocks, bonds, and mutual funds, giving you more control over how your funds grow.

Understanding these differences can help you make smarter decisions when planning for your child’s education.

Other tax benefits can ease financial planning efforts

• The American Opportunity Tax Credit (AOTC) offers up to $2,500 in credit for qualified education expenses during your child’s first four years of college.
• The Lifetime Learning Credit offers up to $2,000 annually for education expenses without restrictions on the number of years you claim it.

Consult with a tax professional to ensure you’re maximizing these benefits.

Research scholarship and grant opportunities

Scholarships and grants can significantly reduce the financial strain of college expenses. Unlike loans, these forms of financial aid do not need to be repaid, making them an ideal option for families looking to minimize debt. The key to maximizing scholarships and grants is thorough research, preparation, and perseverance.

Start early and stay organized

Encourage your child to start applying for scholarships and grants as early as possible, even during their junior year of high school. Use tools such as scholarship search engines and create a dedicated calendar to track deadlines and requirements. Many scholarships are merit-based, focusing on academics, extracurricular activities, or leadership achievements, while others are need-based, considering the financial situation of the family.

Tips for successful applications:

• Tailor each application to match the specific scholarship criteria.
• Write compelling essays that highlight unique qualities and accomplishments.
• Provide strong recommendation letters from teachers, mentors, or community leaders.

Grants are often awarded based on financial need. The most common federal grant is the Pell Grant, which is awarded to undergraduate students who meet specific income eligibility requirements. To be considered t the Pell Grant or other similar grants, you must complete the Free Application for Federal Student Aid (FAFSA) each year. The FAFSA determines how much financial aid your family qualifies for and opens doors to various federal, state, and institutional grants.

Key FAFSA and financial aid tips:

• Submit the FAFSA as early as possible – many programs award aid on a first-come, first-served basis.
• Double-check your application for errors.
• Explore state-specific financial aid programs and private scholarships, which can further reduce costs.

Don’t overlook local resources

Many local organizations, businesses, and community foundations offer scholarships for students in their area. Check with local civic groups, religious organizations, and even your employer to explore scholarships. A few smaller scholarships can add up to significant savings, so it’s worth applying for them alongside larger national programs.

By taking advantage of student loan alternatives such as scholarships and grants, you can drastically reduce out-of-pocket expenses and bridge the gap between your savings and the cost of tuition, ensuring your child has access to higher education without being weighed down by unnecessary debt.

Encourage academic excellence and extracurricular activities

Your child’s performance in school and involvement in extracurricular activities can unlock scholarship opportunities. Colleges often offer merit-based awards to students who do well academically or demonstrate leadership, creativity, or athletic talent.

Scholarship eligibility and application tips:

• Focus on academics early by fostering good study habits.
• Encourage participation in clubs, sports, or community service projects.
• Dedicate time to researching and applying for scholarships – there are opportunities for almost every interest and background.
• Set aside time each weekend to apply for scholarships. Even small awards can add up and significantly offset tuition costs.

Common questions about college savings

1. How much should I save for college?

The amount you should save depends on the type of college and the potential financial aid your student may receive. However, aiming to save at least 50% of potential costs while planning for scholarships and grants can provide a strong starting point.

2. Can savings affect financial aid eligibility?

Savings can have a small impact on financial aid, but the benefits of early college savings often outweigh this concern. Most financial aid formulas only consider a small percentage of parental savings when calculating aid packages.

3. What if my child gets a full scholarship?

With ESA and 529 accounts, you can transfer funds to a family member without paying taxes. This means you can easily use those savings to another child’s education.

4. What if my child doesn’t go to college?

If your child decides not to attend college, many college savings plans allow you to transfer funds to another family member or use the savings for nontraditional education. Because there may be penalties, qualifications, and other requirements under your plan, be sure you know the consequences of any change you make.

5. Are there other savings options besides 529 plans and ESAs?

Yes, other options include custodial accounts like UGMA and UTMA accounts. However, these may not have the same tax advantages and flexibility as 529 plans. Another option is a high-yield savings account, which offers flexibility. So do Roth IRAs, which are designed for retirement but allow penalty-free withdrawals for education.

6. Can I rely on student loans?

While loans can help cover shortfalls, relying solely on them isn’t ideal. High-interest rates and repayment terms can strain your child’s finances long after graduation. Loans should be a last resort, not your first step. Instead, consider student loan alternatives like part-time jobs, work-study programs, or deferred-payment plans offered by colleges.

Final thoughts

Investing for your child’s future is one of the most important financial moves you’ll make, and starting early is the best way to stay ahead. From opening an ESA and understanding financial aid options for college to encouraging doing well in school, every step you and your child take now sets the stage for a bright future.

With the right approach, you can give your child the gift of education while safeguarding your financial goals. Have peace of mind knowing you’re setting them up for success.

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