The Best Way to Save for College: Your Ultimate Guide
In this article:
- 11 Ways You Can Save Before Beginning College
- 4 Ways You Can Save While You're Attending College
- The Best Way to Save for Kids' College Educations
- 5 Popular College Savings Plans for Children and Parents
- How Much to Save for College Per Child
Figuring out the best way to save for college doesn't have to be difficult. By understanding your options, you can start moving forward with a clear plan. This article includes a lot of information about the best ways to save for college if you are a parent of a future post-secondary student.
But what if you are the student? What if your parents weren't able to save for you? What if you don't have a college savings plan to help pay your tuition? And what if you don't want to take out student loans and graduate with debt? Well, you are certainly not alone. Like many other students, you can still find your own ways to save for college tuition and other educational expenses.
Although student loans are helpful, many people try to find ways to attend school without having to turn to loans. In 2014, 70 percent of college graduates completed their studies with an average of $28,500 in student loan debt.* So it's certainly understandable that you may want to leave student loans as a last resort.
However, keeping student loans in your mind as a last option could still be a good idea since a college education does pay off. From 1968 to 2011, the average college graduate earned $20,300 more per year than a high school graduate. And a college degree can also provide more stability during economic downturns. During the last recession, the rate of unemployment for college graduates was half that of high school graduates. Pay cuts for college grads were also less severe.**
So the stats do indicate that taking out student loans to achieve a college education can be a better option than not obtaining a college education at all. But are there other options that can reduce or eliminate the need for student loans? The answer is yes. High school students, graduates, and even current college students can find feasible possibilities for saving money. Let's look at what those may be.
11 Ways You Can Save Before Beginning College
Wondering how to start saving for college? Whether you are still in high school or have graduated and are trying to figure out how to afford college, there are actions that you can take to start saving now. From completing college-level courses in high school to joining a service organization after graduation, see what you can do to start putting money aside so that you can achieve a quality post-secondary education.
1. Find Out If Your School Offers College-Level Courses
If you are currently attending high school, then you may be able to take free college-level courses. Not only can this save you money, it can also reduce the amount of time you have to commit toward obtaining a certificate, diploma, or degree. There are two types of college-level courses available to high school students:
- Advanced Placement (AP)—These advanced courses are offered in dozens of subjects. However, availability varies by high school. When considering taking an AP course, you have to be certain that you are going to be able to meet the demands for additional homework and tests. And if you have a particular college in mind, it is a good idea to check that they will accept your AP course for college credit.
- International Baccalaureate (IB)—These advanced-level courses are not as prevalent in high schools as AP courses, but they are just as rigorous. Also, students can take a set of IB courses over a two-year span and earn an IB Diploma. Note that this option may also require you to complete community service as well as a research paper.
2. Check With Your Parents
Your parents may not have been able to contribute to any of the best college savings plans when you were growing up, but maybe they are in a different financial situation now and have the ability to help you get money for college. It could be beneficial for you to sit down and have this conversation with them. You could be missing an opportunity if you simply assume that your parents are unable to provide assistance. They may surprise you or at least offer good suggestions for how to start saving money for college.
3. Get to Work and Save as Much as Possible
This is probably one of the most tried-and-true ways to save for college tuition and other expenses. If you are currently in high school, then you may want to consider finding a part-time job outside of school hours. If you have recently graduated, then you will want to find the best-paying full-time job that you can or even two part-time jobs that amount to full-time hours. You may also want to keep track of local job boards in order to take on odd jobs—like babysitting, housesitting, or dog walking—as much as you can without burning out. Some people also prefer to take on positions like bartending or serving so that they can earn tips. At the end of each shift, you can stop by the bank to deposit the money straight into your account.
Once that money is coming in and you are ready to start saving, make sure you're depositing it into an account that can work for you. Your best bet is to make an appointment with your bank to set up a high-interest savings or investment account. Your banker will help you choose an option that is in line with your goals. You may be able to grow your savings through interest or investment returns.
4. Consider an Employer That Offers Education Benefits
Did you know that there are employers that will pay some or even all of your tuition? In fact, a substantial number of employers offers education benefits. From Starbucks and Gap to Apple and Best Buy to Bank of America and Boeing, you may be surprised to discover the opportunities. A quick Google search can help you compile a list of potential employers who could help you start your career and attend school.
5. Save Money on Rent
Are you currently renting an apartment or house? Have you considered other options that could dramatically reduce the amount of rent you pay? Maybe you could rent only a room instead. Some landlords even offer room and board, which can include things like heating, electricity, WIFI, and cable. Or maybe you could move in with your parents or other family members who will let you live there for free, for a reduced rate, or in exchange for chores around the house. Then, all of the money you save can go straight into your college savings or investment account.
6. Reduce Your Bills
Take some time to sit down with all of your monthly bills and carefully review them. Do you really need cable TV along with Internet services? Do you require both a Netflix and Amazon Prime Video subscription? Can you reduce your talk, text, and data limits on your cell phone? Can you cut back on your electricity or gas consumption? These are the kinds of questions to ask yourself. See where you can cut back and even call each of your service providers and explore cheaper options. Many times, there are customer service reps who are willing to help you review your accounts and explore more affordable plans.
7. Make Sacrifices
Are your friends heading to Cabo for spring vacation? Do you like to buy the best designer fashions and accessories? Do you always have to have the latest smartphone or tablet? You may have to pass by fun times and expensive items if you are trying to figure out how to raise money for college. But don't be sad. Just remember that you are investing in your future; an investment that will likely pay off in the long-term. And then you can enjoy Cabo in your designer swimsuit taking pictures with your new iPhone. The sacrifices will be worth it.
8. Find Free Money
Free money; there's no such thing, right? Think again. You can uncover numerous scholarship and grant programs—from local civic organizations to federal departments—that provide money that you don't have to pay back. Eligibility for funding can be based on either financial need or academic merit.
Now you're probably wondering, "How does a person uncover funding opportunities?" A great place to start is with your high school guidance counselor. He or she will likely know of many funding sources that you could pursue. You can also check with the financial services department at your local college. Even if you are not registered as a student there, they may still be willing to help you uncover funding options. A Google search can also help you discover possibilities.
So as you sit and ponder how to pay for college with no money, scholarships and grants could be your answer.
9. Join the Military or Another Service Organization
Under certain conditions, the Air Force, Army, Marine Corps, or Navy will cover some or all of your tuition and eligible expenses once you have completed specific terms of service. Additionally, organizations and programs like AmeriCorps, Peace Corps, and National Health Services Corps offer to pay eligible education expenses in exchange for service. So if you are willing to commit service time, then it is quite possible that you could attend college tuition-free. And that's not to mention the valuable and rewarding experience that you could obtain during your service term.
10. Go to Community College First
Are you considering enrolling in a four-year degree program? Then you may want to consider attending community college first. Quite often, you can complete your first two years at a community college—which is typically less expensive than other public and private institutions—and then you can transfer to your chosen school to complete your last two years.
11. Consider Studying Abroad
You know that aunt who lives in Canada or that distant cousin in New Zealand? What if you could live with him or her and attend school abroad? You're probably thinking, "How is that going to save me money?" But the reality is that many other countries accept students from the U.S., and the tuition can be substantially cheaper or even free.
Some European countries, like Norway and Germany, offer free or highly discounted education to international students. And a strong U.S. dollar can make attending school in countries like Canada or New Zealand quite affordable. You'll need to do your research and assess all education and living costs, but you may be able to save some money and have a cool experience studying abroad.
4 Ways You Can Save While You're Attending College
Want to learn how to save money in college? If you are ready to start college now but aren't sure how to pay for it without taking out student loans, then check out the following tips for saving money while you are in school.
1. Attend College Part-Time
If you would like to get started on your education right away, then you might want to consider studying part-time. This can help you pay your way through college by holding down a part-time job at the same time. And there are actually a number of good jobs available to students that can make paying for school that much easier. Get some ideas by checking out the possibilities for high-paying part-time jobs and high-paying jobs for college students.
2. Earn While You Learn
Contrary to attending college part-time, you could choose to attend college full-time and find ways to make money around your school schedule. Some colleges will even offer tuition payment plans, which can make it even easier to work and pay your way as you go. If you need some ideas about how you can make money while in college, then check out How to Make Money in College Without Burning Out.
3. Enroll in Online Classes
A growing number of institutions are offering certificate, diploma, and degree programs completely online in an effort to help people just like you. By signing up for online classes, you can hold down a good job and tailor your schooling around your schedule. Depending on how many classes you take at one time, you may even be able to continue working in a full-time position.
4. Take Advantage of Student Discounts
Did you know that there are hundreds of companies across the country that offer student discounts? You can easily save yourself some money while attending college by becoming familiar with the organizations that will provide you with a discount. By showing your student card, you can receive discounts on books, clothing, electronics, food, household merchandise, phones, school supplies, services, shoes, and software. You can even get a break on travel and entertainment costs for those times that you need to spend a little money on rest and relaxation.
The Best Way to Save for Kids' College Educations
Saving for college (for baby-, toddler-, or older-aged kids) is a major goal of most parents today. In fact, one survey of American parents in 2016 found that 88 percent of them planned to contribute toward their kids' college funds. For 32 percent of those parents, the top way they planned to do that is through saving.*** But a lot of them weren't exactly sure how to go about it. Maybe you're one of them.
So here's an overview of a process that may prove very useful to your family. Explore the following tips about how to save for kids' college educations. Then, continue reading for additional details that expand on some of this advice.
1. Begin as Early as Possible
Kids grow up fast. It may seem like 17 or 18 years is a long time, but those years have a way of speeding by, especially when you're busy raising a family. And if you let too many years slip by without taking action on your kid's college fund, then you won't be taking advantage of the world's most powerful savings tool: compound interest.
When it comes to saving for college, compound interest is your best friend. It's what gives you the chance to triple—or gain even higher returns on—the amount of money that you invest during your kid's growing years. But compound interest needs time and regular contributions in order to work that kind of magic—the longer, the better.
Still, it is never too late to start investing for kids' college educations. Every dollar that you save now or gain through investments is a dollar that won't have to be paid or borrowed later.
2. Get Clear About Your Financial Priorities
Do you struggle with whether to save for college or retirement? Many parents do. But ask yourself this: Do you expect your kids to pay for your retirement? Like most parents, you probably don't. So it's up to you to look after your own future.
That's why most financial experts advise making your retirement savings a higher priority than contributing to a college fund for kids. They also advise establishing a fund for emergencies and paying off your high-interest debt. You can still save for college, but that goal doesn't need to be your top concern.
After all, according to one survey, 89 percent of America's high school students plan to pay for at least some of their own college expenses.*** And parents who save even just a little money for college often have kids who want to help contribute to those efforts by earning and saving whatever they can as well.
In reality, few families can afford to save enough to pay for 100 percent of a college education. So, yes, saving up for college is important and worthwhile. But parents also have a responsibility to look after their own retirements. Do what you can for your kids without sacrificing your ability to afford life during your senior years.
3. Start Researching Popular College Savings Plans
Today's parents have several possible ways to save for college. The most popular ones are detailed further down. But they include 529 plans, education savings accounts (ESAs), Roth IRAs, and custodial accounts. You don't necessarily need to choose any of them right away. Simply exploring the various options online is a good way to start getting a handle on what you may decide to do going forward.
As you consider your options, keep this tip in mind: It's usually best to maintain any kind of large savings account under your name instead of your child's. That way, you'll help prevent your child from missing out on any potential financial aid that he or she might otherwise qualify for when entering college. (A student's financial assets tend to impact eligibility for financial aid more than a parent's.)
4. Consider Consulting a Trusted Financial Advisor
After investigating some of the savings options on your own, it's often a good idea to enlist some outside help. Try to find a financial advisor who has a reputation for being trustworthy and offering good advice about saving money for college. He or she will likely be able to help you select the plan that is most suitable for your family's particular situation. Ultimately, you'll want a savings plan that minimizes taxes and fees and maximizes your return on investment.
Just remember this key point: You don't necessarily need to purchase a savings plan through a financial advisor. If your advisor is giving you a hard sell on his or her firm's products, then it's likely that those plans will be more costly in the long run than what you may be able to start and manage yourself. So you may want to look for financial planners who operate on a fee-only basis (as opposed to those who derive most of their incomes from sales commissions).
5. Determine How Much to Save and Finalize Your Plan of Action
In a 2016 survey of parents across the U.S., only about 47 percent of them said that they know how much to save for college.*** That's not really surprising. After all, it's impossible to predict the future with surefire accuracy. But it is possible to come up with an educated guess about how much college will cost when your children are ready to begin their higher educations.
The easiest way to find those numbers is to use an online college cost calculator. It will allow you to input variables such as your child's current age, the expected type of college that he or she will attend, the expected rate of inflation, and how many years he or she will be in school.
With those numbers in hand, you can then figure out things like whether you are going to save for 100 percent of your child's college expenses or save for only a portion of them. Many parents decide to save for around 30 to 50 percent of their children's expected college expenses. But you'll need to determine what you can afford to save under the plan that you select.
Read more about how much to save for kids' college educations below.
6. Open Your College Savings Account and Start Contributing to It
This step is obvious, but many parents put it off, wasting valuable time when their money could be growing. The thing is, you usually don't even have to start with a large investment. Many plans allow you to get started with small contributions. So it doesn't make much sense to delay.
It's also worth looking into automating your savings for college. By signing up to have a certain portion of each paycheck deposited directly into your college savings account, you won't have to think about it. And you won't be tempted to spend that money on something less important.
Signing up for an affinity program is another easy way to contribute small amounts to your savings plan without thinking about it. For example, many states allow you to link your 529 savings account to a rewards credit card or other type of loyalty program. Some financial institutions offer credit cards that enable you to earn cash back on your purchases and put those funds toward your 529 plan. And programs such as Upromise let you register your credit or debit cards for the same purpose. (Just make sure you don't go into debt while trying to "save." Always pay off your balances in full each month.)
7. Involve Your Friends and Family
It may not be the very best way to save money for kids' educations, but every extra bit of support helps. Why not ask the people in your life to contribute to your children's college savings plans instead of buying gifts like toys, electronics, or clothes for holidays, birthdays, and other special occasions? That way, they get to feel like their gifts or more lasting and meaningful. And your children also get the benefit of learning the importance of saving and seeing how much the people in their lives care about their future.
8. Revisit Your Savings Plan Every Year
It's a good idea to monitor how your investments are performing and look into any new ways to maximize your returns or decrease fees and taxes. After all, market conditions change, and governments sometimes update laws or regulations in ways that may benefit your family. Just be careful about overreacting to a stock market crash or other temporary period of underperformance that affects your plan. Over the long run, things tend to balance out and move in more of an upward trend.
That said, many financial experts advise putting your savings into riskier investments while your child is young and gradually moving your money into more stable investments as he or she gets closer to graduating from high school. Make sure that you are also taking advantage of any state income tax deductions or other benefits that may be offered by your current plan. Ultimately, the best college fund is the one that you feel most comfortable contributing to and that lets you grow and keep as much of your savings as possible.
9. Involve Your Child
Kids don't necessarily get much exposure to financial matters in school. So it's important for parents to gradually introduce financial concepts to their children. Start with the basics when they are in grade school and involve them in more and more of the savings process as they get older.
For example, tell them why you are learning how to save for college and why you want them to help. When you feel that they are old enough, share your kids' college savings balances with them and discuss how they can contribute to making that money grow even more. Maybe you can offer to match any money that they put into the college education savings account.
10. Increase Your Contributions as Your Kid Gets Older
A lot of financial planners recommend gradually increasing the amounts that you put into your college saving plan. That's because, as your child gets closer to high school graduation, there is less time for compound interest to keep working at such a high level. So contributing larger amounts helps to maximize your savings as your investments reach maturity.
5 Popular College Savings Plans for Children and Parents
What is the best way to save for college? In most cases, the best way is to make small contributions—on a weekly, bi-weekly, or monthly basis—to a savings account that offers special tax advantages and the benefit of time and compounding interest. However, a huge variety of plans are available. So it pays to investigate as many as you can in order to find one that makes sense for your family's situation.
The following options represent some of the best ways to save for college.
1. 529 Savings Plans
These plans are named after section 529 of the federal Internal Revenue Code. They are special savings accounts that let you start saving for kids' college educations without the gains on your investments being taxed. The money that your child eventually withdraws won't be subject to any taxes as long as it is only used for qualified college expenses.
The Internal Revenue Service (IRS) defines qualified education expenses as costs that are explicitly linked with attending school. Eligible expenses include college tuition and fees, books and supplies, equipment, and special needs services that are necessary for going to school at an accredited institution. Room and board also qualifies within the amount that would be charged if you resided in housing that is owned and operated by your school. In addition, computers, software, and Internet access qualify as long as they are for the primary benefit of the 529 plan's beneficiary during his or her enrollment.
Qualified education expenses do not include things like smartphones, transportation costs, fitness club memberships, insurance payments, or items that are primarily for entertainment purposes. Using 529 funds for anything other than educational expenses can subject a student to income taxes on those withdrawals as well as federal and/or state penalties of 10 percent on the amounts withdrawn.
Most 529 college savings plans are sponsored and operated by individual state governments, so they vary in what they offer. But, in most cases, you don't have to be a resident of a certain state in order to participate in that state's plan. You can compare the 529 plans of different states and choose the best one for your family. However, some states do provide extra tax benefits or other incentives to their own residents for enrolling in their plans.
Another key point is that the savings from 529 plans are considered a parental asset, not the beneficiary's (i.e., child's) asset. So using a 529 savings plan isn't likely to hurt your kid's chances of getting federal financial aid. And you can contribute to these plans regardless of your income.
2. 529 Prepaid Tuition Plans
In addition to 529 college savings plans for children, some states offer prepaid tuition plans for public colleges and universities. The idea is that you can save money by paying for some of your kid's future education now, at today's prices. So, for example, if a year of tuition costs $8,000 today and you paid $4,000 now, you will have bought half a year's tuition for later on—even if that tuition rises to $16,000 or more between now and then.
In theory, that is supposed to be how it works. You purchase tomorrow's college or university tuition at today's prices. However, in practice, some parents end up paying highly inflated prices due to extra fees that are part of some states' plans. That's why it is important to read the fine print closely. You also may want to consult with a financial expert to ensure that you are actually getting a good deal.
3. Roth IRAs
Parents sometimes use these types of individual retirement accounts as another way to save for college tax-free. It allows you to hedge your bets. If your kid doesn't end up going to college, then you can still use the savings to help fund your retirement. After investing your money for at least five years in a Roth IRA, you can withdraw funds for your child's college and not owe any taxes or penalties on them as long as they go toward qualified education expenses (as defined by the IRS).
4. Coverdell Education Savings Accounts (ESAs)
An ESA works a lot like a 529 savings plan as a way to build funds for college tax-free. However, there are some important differences. For instance, you aren't allowed to contribute as much money to an ESA each year. Unlike a 529 plan, you also must disperse the funds by the time your child is age 30 if you want to avoid paying taxes or penalties on them. But you can include a wider variety of investments as part of your ESA. And the funds can also be used toward qualified education expenses for elementary or secondary school, not just college.
5. Custodial Accounts
This option is sometimes appealing to parents who want to give their children a little more future flexibility. Custodial accounts are made possible by the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). They allow a few tax benefits, but not nearly to the extent of 529 plans or other similar options. In fact, many people end up paying significant income taxes on their withdrawals.
But the biggest point to remember is that your child will be able to use the funds for anything that he or she wishes, which may not make custodial accounts the best way to save money for kids' college educations. Once they reach the age of majority (either 18 or 21, depending on the account), they will be able to withdraw the funds for traveling, starting a business, buying cars, or whatever else they want. They aren't required to use the money for going to college, university, or trade school.
How Much to Save for College Per Child
"How much should I save for college for my child?" That's a tough question to answer without knowing all of the variables. But you can arrive at a figure that makes sense if you're willing to put in the effort. Use an online college savings calculator. And ponder these questions:
- What type of post-secondary school will your kid attend? Public colleges and universities are often less expensive than private schools. Research how much college costs and remember that prices will probably continue to rise by at least a few percentage points each year. (Over a 17-year period, college costs may double or triple.) If you have a specific college in mind, find out how much it costs to attend that school today and research how much tuition there has risen over the last 10 to 20 years.
- Do you plan to cover 100 percent of your child's college expenses or only a portion of them? Think about what is realistic based on what you learned from the previous question. What seems fair? Most students expect to cover some of their own costs. So maybe you will decide to cover only 25 to 50 percent of the expenses.
- How much do you think your income will grow? Earning more money in the future may allow you to save more. But, of course, most expenses will also rise with inflation. Do you have the potential to make your family's income rise faster than inflation?
- How much financial aid do you think your child may qualify for? Admittedly, this is hard to predict since you have no way of knowing whether or not your kid will receive scholarships. However, most financial aid packages are awarded after accounting for a student's expected family contribution (EFC). By subtracting your kid's potential EFC from the expected cost of a particular school, you can get a general idea of how much financial aid your child may receive. Use an online EFC calculator. Then, increase the numbers based on an estimated rate of inflation for the period between now and when your child will enter college.
- Are you willing to help pay for your child's college while he or she is actually in school by using a portion of your future income? Being able to pay a portion of expenses while your child is in college, university, or vocational school can reduce the amount of money that you'll need to start saving now.
Put Your Future Into Focus
Now that you have uncovered useful tips about the best way to save for college, you can sit down and prepare a customized plan that works for your unique circumstances. And while you're at it, why not consider which training path you would like to take? Explore the possibilities right now by generating a list of schools offering programs near you. Just enter your zip code into the search tool below to check them out!
* The Institute for College Access & Success, Project on Student Debt, website last visited on December 17, 2015.
** Federal Reserve Bank of San Francisco, Does College Pay?, website last visited on December 17, 2015.
*** College Savings Foundation, website last visited on September 14, 2016.