How To Save For College And 6 Ways To Get Started

There are multiple ways to save effectively for college, depending on your financial situation. Some options for helping your child pay for college include guiding them when they apply for scholarships and grants.

Once you’ve decided you want to help save money for your own or your child’s college education (and ideally, after you’ve decided on an amount you want to save), consider the following six options to help you reach your goal.

The Best Way To Save For College

According to the National Center of Education Statistics, the average cost of college (tuition and fees only) at a 4-year public institution in the 2021-2022 academic year was $9,678, private nonprofit schools $38,768 and private for-profit schools $17,825 per year. This amount is for undergraduate programs only, and the costs could rise each year, due to factors like inflation.

While you don’t need to save this amount for your child, it’s helpful to have as a benchmark as you’re trying to find the best way to save for college. Keep in mind that what you consider the best way will depend on you and your family’s financial situation and needs.

1. 529 Plan

A 529 plan, or qualified tuition program, allows you to contribute after-tax dollars. You can withdraw the funds, though only funds used toward qualified educational expenses will be tax-free. Each state may offer its own 529 plan, though you can generally open and contribute to any 529 plan. Each state, however, has its own maximum contribution limits, so check these before you open an account. Also be sure to look at different 529 plans to see what the investment options and fees are before making a decision.

Here's now to open a 529 account:

• Choose a 529 plan
• Name a beneficiary (typically your child or whoever will be using the money for educational expenses)
• Open an account with a provider and select your investments
• Fund your account

2. High-Yield Savings Account

A high-yield savings account is held at a bank or credit union and offers a higher interest rate than a traditional savings account. The interest rate you earn will depend on the bank and can fluctuate based on economic factors. You may also have to pay monthly fees or keep a minimum balance in the account. There are typically no limits as to how much you can contribute, and funds are generally insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to a certain amount.

You can open a savings account in your name, or in your child’s name with you as the guardian. If it’s your child’s account, they will become the full account owner once they reach age 18 or 25, depending on your state.

To set up a high-yield savings account, first determine what types of features you want. For example, do you want access to ATMs, online banking options, or the highest interest rate available? Then, shop around for the best fit and follow the instructions from the bank to open the account — you’ll be asked to provide your details and your child’s if you want to open it in their name. Then, you can fund the account and contribute funds on a regular basis.

3. Roth IRA

A Roth IRA is a type of retirement account for contributing post-tax dollars. Contributions can be withdrawn tax-free and, in most cases, so can any earnings 5 years after you open the account. Withdrawals for qualifying educational purposes may also be tax-free.

While you can use the money from your Roth IRA for other purposes, there are contribution limits. For the 2023 tax year, you can contribute up to $6,500 (or $7,500 if you're 50 or older) and $7,000 in 2024 (or $8,000 if you’re 50 or older). Depending on your income and tax filing status, you may not be able to contribute up to the maximum amount. You may be able to contribute a reduced amount, or you may not be able to contribute at all. To open an IRA account, choose a brokerage and follow the instructions — you’ll likely be asked to provide information like your name, Social Security number and type of account you want to start. Then fund the account and choose your investments.

4. Education Savings Account (ESA)

An education savings account (ESA) is similar to a 529 account in that it’s specifically earmarked for education purposes and offers tax-free withdrawals for qualified expenses. You can also use the account to pay for qualified elementary and secondary educational expenses.

However, there are some significant differences to this account:

• You need to be under an income threshold to contribute
• Contribution amounts are much lower than 529 plans
• Funds need to be withdrawn by the time the beneficiary reaches 30 years old
• Account can only be opened for a beneficiary under 18 years old

Though there are more restrictions, the main benefit is that you may have more investment options compared to a 529 plan. Shop around with different companies to find the features you want most in an ESA and follow their instructions to open and fund an account.

5. Savings Bonds

A savings bond is a type of long-term investment that has you essentially loaning money to the government. The bond earns interest as the government pays you back for the loan — you can be the sole owner or register an additional person as the co- or sole owner. Only the person who owns the bond can cash it in. There are several savings bonds to choose from and each will earn a different rate.

You won’t be able to purchase savings bonds at a brokerage, you can only do so on TreasuryDirect.gov, the U.S. Treasury’s website. However, you can cash them in at TreasuryDirect.gov or at your bank. You will need to provide your ID. Keep in mind that if you cash them in within a year of purchasing you may have to pay a penalty.

6. Prepaid Tuition Plans

A prepaid tuition plan is a type of education savings plan where you can purchase credits to cover tuition at a later date. These types of plans are typically sponsored by states and some may include incentives like matching a certain portion of your contributions. The funds on these accounts can go toward qualifying costs at certain schools (usually in-state public colleges). You and your college-bound child may also be required to be a resident of the state in order to use the credits.

Since not all states offer prepaid tuition plans, first do some research on whether they're available in your state (or where your child plans on going to college) and look to see what you need to do to start contributing to one. 

Currently, only the following states offer prepaid tuition plans:

• Florida
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Nevada
• Pennsylvania
• Texas
• Washington

6. Prepaid Tuition Plans

A prepaid tuition plan is a type of education savings plan where you can purchase credits to cover tuition at a later date. These types of plans are typically sponsored by states and some may include incentives like matching a certain portion of your contributions. The funds on these accounts can go toward qualifying costs at certain schools (usually in-state public colleges). You and your college-bound child may also be required to be a resident of the state in order to use the credits.

Since not all states offer prepaid tuition plans, first do some research on whether they're available in your state (or where your child plans on going to college) and look to see what you need to do to start contributing to one. 

Currently, only the following states offer prepaid tuition plans:

• Florida
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Nevada
• Pennsylvania
• Texas
• Washington

The Bottom Line

Saving for college as soon as possible — even if your children are still young — will help give you more opportunities to reach your target amount. As long as your financial situation is stable, you can choose to save as much as you want. It may also be helpful to talk with your older child about the responsibilities of paying for college and what they can do to help. Whether it’s taking on a part-time job when they’re old enough or applying to grants and scholarships, every little bit helps.