How to save for college: strategies and tactics 

Saving for college for your child or another loved one is a big step in planning for their future.  

But before you start saving for a child’s college education, it’s good to know your options. Some of the most popular savings vehicles include 529 plans, education savings accounts (ESAs), Uniform Gifts to Minors Act (UGMA) accounts, and Uniform Transfers to Minors Act (UTMA) accounts.  

These are some of the more formal ways to start saving for kids’ college 

costs. There are other, less formal options for students to build up funds for college, such as pursuing scholarships and financial aid or getting a job to put money away.   

This guide explores the various methods parents and students can start saving for college.  

Saving for college: different savings accounts 

If you’re like the nearly half of US workers who participate in a retirement savings plan, you regularly contribute to a retirement account at your job. Similarly, you can contribute to an account specifically designed to help you with saving for college.  

You can typically set up contributions to automatically come out of your bank account at set intervals. Some employers even enable you to make contributions from your paycheck. Here are some examples of different college savings accounts to consider.  

529 plans 

A 529 plan is a tax-advantaged savings account specifically designed for college savings. A 529 plan’s tax benefits are only available if the money goes toward qualified education expenses. This includes college costs, certain apprenticeship programs, and student loan repayment up to a $10,000 lifetime limit.  

A 529 plan’s biggest benefit is the tax break. Earnings grow tax-free, and the IRS won’t tax you on withdrawals for qualified expenses. Many states even offer tax deductions or credits for contributions to 529 plans.  

Generally speaking, 529 plans don’t have income, age, or contribution limits, giving parents more flexibility in saving for their kids’ college costs. However, states do set aggregate limits on 529 account balances per beneficiary, but they can be quite high—ranging from $235,000 to $575,000.  

ESAs  

A Coverdell ESA, or education savings account, is another type of tax-advantaged investment account that helps people save money for school costs. You won’t pay taxes on the income your investments generate. Also, you can withdraw funds without penalty if you use them to pay for college or other qualified educational expenses.  

ESAs are like 529 plans. You can use them to pay for college, as well as primary and secondary schooling. However, it’s important to make sure you use ESA earnings to pay for eligible school costs. If you don’t, the tax break may not apply to your distributions.  

Unlike 529 plans, ESAs have income limits. You can’t contribute to an ESA if you: 

• Make more than $110,000 if you’re filing “single”  
• Make more than $220,000 if filing “married filing jointly”  

There are also limits on how much you can give. You can only give up to $2,000 per child or beneficiary each year. It’s also worth noting that beneficiaries must use ESA funds by age 30.  

UTMA or UGMA 

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are also investment accounts that help in saving for college. With a UGMA or UTMA account, you can save and invest money in an account in your child’s name.  

These are custodial accounts, meaning you control the account until the beneficiary reaches the age of majority, which can be between 18 and 25, depending on the state.  

UGMA and UTMA accounts work differently than ESAs and 529 plans in terms of taxes. With these accounts, you contribute after-tax dollars, which are taxed at varying rates. As of 2024:  

• The first $1,250 in earnings are tax-free 
• The next $1,250 is taxed at the child’s tax rate 
• Any additional earnings are taxed at the parent’s tax rate 

It’s also important to think about how UGMA and UTMA accounts impact financial aid. Unlike 529 plans, UGMA and UTMA accounts can affect your child’s Free Application for Federal Student Aid (FAFSA) eligibility because they’re considered your child’s assets. This means their financial aid eligibility is reduced by 20% of the account’s value.  

High-yield savings accounts  

Another worthwhile college savings strategy is to open a savings account that earns a lot of interest. Start early to get the most out of compound interest. If you go this route, be sure to set up automatic transfers to ensure consistent savings. 

Shop around for high-yield savings accounts with the best annual percentage yield (APY). Some accounts have APYs above 5%. Online banks often have higher rates than traditional banks.  

One perk of these accounts is that they’re not affected by market fluctuations. They also offer flexibility, as there are no penalties for taking out money for things other than school, unlike 529 plans or Coverdell ESAs. 

Remember the interest you earn within high-yield savings accounts is taxed. These accounts are great for saving quickly and being flexible, but they may not grow fast enough to save for college. Combining them with investment options like 529 plans can be a better way to save for college. 

How much should you save for college expenses? 

With college costs constantly rising—more than doubling since 2000—knowing how much to save for college expenses is tricky. The average cost of college in the United States is more than $38,000 per student per year. But much depends on the type of school you attend. 

Here’s how the annual cost of attendance breaks down by four-year school type, per the Education Data Initiative: 

• In-state public school: $27,146 
• Out-of-state public school: $45,708 
• Private school (nonprofit): $55,840 
• Private school (for-profit): $32,895 

Since the cost of college continues to grow, it’s best to aim higher than those numbers—and start saving as early as possible. That’ll give your money more time to grow through compound interest.  

According to higher education expert Mark Kantrowitzf, if you begin saving when your child is born, about one-third of your college savings will come from your investments. However, if you start when your child is in high school, only about one-tenth will come from your investments. This difference highlights the importance of starting early. 

If you haven’t started saving yet, don’t panic. It’s never too late to begin, but you’ll want to strategize accordingly. You may need to save more aggressively and rely more on scholarships, grants, or loans. 

A popular rule of thumb is the one-third rule:  

• One-third of college costs come from savings and investments.  
• One-third comes from current income and financial aid.  
• One-third comes from student loans.  

This approach can make savings goals feel more manageable. 

Whether your child will go to college in or out of state can also greatly affect your savings goal. As the Education Data Initiative’s numbers showed, out-of-state tuition is typically much higher than in-state rates.  

Kantrowitzf contends that if you’re aiming to attend a four-year in-state public college, you might need to save around $300 per month starting at birth (assuming a 3% inflation rate). For a private college, that jumps to about $600 per month. 

College savings tips for students 

In addition to the one-third rule, getting your kids involved in their own college savings can make a big difference. Here are some practical ways your student can pitch in and invest in their education. 

Apply for scholarships 

Unlike loans, scholarships offer money that doesn’t have to be paid. They can cover things like tuition, books, and living costs.  

Some scholarships are based on academic performance or need. Others might be for people of specific backgrounds or people who meet certain criteria.  

With more than 1.7 million scholarships awarded every year., there are plenty of opportunities to explore: 

• Search for scholarships online—the US Department of Labor’s CareerOneStop Scholarship Finder is a great place to start 
• Check with your current or prospective school’s guidance office  
• Research local community organizations  

Apply for financial aid 

Applying for financial aid can make college significantly more affordable. By filling out forms such as the Free Application for Federal Student Aid (FAFSA) and CSS Profile, students can determine whether they qualify for financial aid from many sources, including grants, scholarships, loans, and work-study programs. These can greatly reduce the cost of tuition, fees, room and board, books, and other costs. 

Financial aid packages often combine federal, state, and school help. This gives students a better idea of how much they need to pay. Importantly, not all financial aid needs to be paid back. 

Get a job 

Getting a job can be a powerful way for future college students to contribute to their college savings. Part-time work during high school or summer jobs can help build savings over time. Consistently setting aside even a small percentage of earnings in a college savings account or high-yield savings account adds up quickly. 

Working also teaches important life skills like managing money, time, and responsibility—important skills for college and beyond. Some employers even offer tuition assistance or other educational benefits. 

Complete college-level courses in high school 

Earning college credits while in high school can help students save on college. That’s because they’ll need to earn fewer credits when they start college.  

Concurrent enrollment programs (sometimes called dual enrollment), which enable high school students to take college courses and earn college credits, can give students a head start on higher education. Programs like Advanced Placement (AP) and International Baccalaureate (IB) also offer pathways for high school students to earn college credits. 

Saving for college doesn’t have to be complicated 

When it comes to saving for college, there’s no shortage of available options—from investment savings accounts like 529s and ESAs to high-yield savings accounts and scholarships. 

In addition to the tools and tips mentioned above, good money habits can strengthen any college savings plan. Budgeting skills, investment know-how, tax knowledge, and credit mastery are life skills your children will need in college and beyond. 

Ready to start building your—and your future college student’s—financial literacy? Check out Intuit for Education, our free, self-paced financial literacy curriculum. Its aim is to help you and your child become confident in personal finances.