How Much Should Parents Save for College?

Families often consider how much financial support to provide for higher education. Understanding college costs and available savings vehicles helps families navigate this financial undertaking.

Projecting Future College Costs

Planning begins with understanding college expenses. The total cost of attendance includes tuition, fees, room and board, books, supplies, personal expenses, and transportation. For the 2024-2025 academic year, average published tuition and fees for full-time undergraduate students were approximately $11,610 for public four-year in-state institutions, $30,780 for public four-year out-of-state institutions, and $43,350 for private nonprofit four-year institutions. These figures represent the “sticker price,” the published cost before financial aid.

The actual amount a family pays is often the “net price,” which is the sticker price minus any grants or scholarships received. College costs have historically increased at a rate higher than general inflation. From 2010 to 2023, the average annual tuition inflation rate at public four-year colleges was around 2.64%. This consistent increase means costs will likely be significantly higher by the time a child enrolls.

To estimate future expenses, families can utilize online college cost calculators provided by educational institutions or financial planning websites. These tools factor in current costs, expected inflation rates, and the number of years until enrollment to project a future total. For example, if college tuition and fees continue to increase by approximately 3% to 5% annually, a program costing $30,000 today could cost over $50,000 in 15 years. This projection helps establish a realistic savings target.

Understanding College Savings Options

Several dedicated savings vehicles offer tax advantages for education expenses. Each option has unique features regarding contributions, withdrawals, and flexibility.

One widely used option is the 529 plan, a state-sponsored investment account designed for education savings. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, including tuition, fees, room and board, books, supplies, computers, and related equipment. Some plans also allow up to $10,000 per year for K-12 tuition expenses and a lifetime limit of $10,000 for qualified student loan payments. While there are no federal annual contribution limits, contributions are considered gifts and may be subject to gift tax rules if they exceed the annual gift tax exclusion ($19,000 per individual in 2025).

A special rule allows for “superfunding,” where up to five years’ worth of contributions ($95,000 for individuals, $190,000 for married couples in 2025) can be made at once without incurring gift tax. This is provided no further contributions are made for the next five years.

Another option is the Coverdell Education Savings Account (ESA). This account allows for tax-free growth and withdrawals for qualified education expenses, encompassing both K-12 and higher education costs. The annual contribution limit for a Coverdell ESA is $2,000 per beneficiary, regardless of the number of contributors. Eligibility to contribute is subject to modified adjusted gross income (AGI) limitations, which phase out for single filers with AGI between $95,000 and $110,000, and for married couples filing jointly with AGI between $190,000 and $220,000. Funds generally must be used by the time the beneficiary reaches age 30.

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, can also be used for college savings. These accounts are established in the child’s name, with an adult acting as custodian until the child reaches the age of majority (typically 18 or 21, depending on the state). Unlike 529 plans or Coverdell ESAs, contributions to UGMA/UTMA accounts are not tax-deferred, and earnings are subject to the “Kiddie Tax” rules. For 2025, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate, and amounts above $2,700 are taxed at the parents’ marginal tax rate. A significant consideration for UGMA/UTMA accounts is their impact on financial aid eligibility, as they are considered student assets and can reduce aid more substantially than parent-owned assets like 529 plans.

Roth Individual Retirement Accounts (IRAs) primarily serve as retirement savings vehicles, but offer flexibility for education expenses. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time, as they are made with after-tax dollars. Earnings can also be withdrawn tax-free and penalty-free for qualified higher education expenses, provided the account has been open for at least five years.

This dual purpose is advantageous, as any unused funds remain available for retirement. Roth IRA assets are not reported on the Free Application for Federal Student Aid (FAFSA) and do not negatively impact financial aid eligibility. The annual contribution limits for Roth IRAs are lower than those for 529 plans, set at $7,000 for individuals under age 50 in 2024.

Developing a Personalized Savings Strategy

Creating a college savings strategy involves aligning projected costs with financial capabilities and time horizons. After estimating future college costs, families can determine a realistic savings goal. Many families aim to save enough to cover a significant portion, such as one-third or one-half, of the projected costs, planning to cover the remainder through current income, financial aid, or student loans. Online college savings calculators can help determine the monthly or annual contributions needed to reach a specific target.

The Student Aid Index (SAI) has replaced the Expected Family Contribution (EFC) as the metric used to determine federal financial aid eligibility. The SAI is an index number calculated from information provided on the FAFSA, considering family size, parent income, parent assets, student income, and student assets. A lower SAI indicates greater financial need and potential eligibility for more aid. While savings reduce financial need, assets held in parent-owned accounts, such as 529 plans, have a lesser impact on financial aid calculations compared to assets held directly in a student’s name, like UGMA/UTMA accounts.

Starting a savings plan early allows for greater compounding of earnings and reduces the pressure of large monthly contributions. Consistency in saving, even small amounts regularly, can build substantial balances over time. As financial circumstances change, families can consider increasing contributions to accelerate progress toward their goal. Periodically reviewing the savings plan against current college cost projections and adjusting contributions as needed ensures the strategy remains on track.

Integrating College Savings with Other Financial Goals

College savings is one of many financial objectives for families. Balancing college savings with other goals, such as an emergency fund, high-interest debt repayment, and retirement savings, is important.

Retirement savings often take precedence over college savings because there are typically no alternative funding sources for retirement once a person stops working. Unlike college, which can be financed through loans, scholarships, or current income, retirement relies solely on accumulated savings. Financial advisors suggest maximizing contributions to retirement accounts, such as 401(k)s and IRAs, especially to receive any employer matching contributions, before directing significant funds to college savings.

Establishing an emergency fund with three to six months of living expenses is also a priority. This fund provides a financial safety net, preventing the need to tap into long-term savings, including college funds, for unexpected expenses. High-interest debt, such as credit card balances, should also be addressed promptly, as the interest accrued can significantly erode overall financial progress and limit the ability to save effectively for any goal.