Should I Save for My Child’s College?

Saving for a child’s college education is a common concern for many families. Higher education involves substantial financial commitments, with costs consistently rising. Families often balance providing educational opportunities with other financial obligations. This requires considering financial priorities and understanding college funding.

Prioritizing College Savings Amidst Other Financial Goals

Before college savings, establish a strong personal financial foundation. A fully funded emergency account, holding three to six months’ expenses, buffers against financial setbacks. This prevents new high-interest debt or drawing from long-term savings in a crisis. Address high-interest consumer debt, like credit card balances, as their rates erode financial progress.

Prioritize retirement account contributions, especially up to employer matching. Employer matches offer an immediate, guaranteed return, a powerful wealth accumulation tool. Unlike college loans, retirement borrowing options are non-existent. Parental financial stability in retirement avoids burdening children, indirectly supporting their well-being.

Once emergency funds are in place, high-interest debt managed, and retirement contributions on track, families can consider college savings. Other goals, like a home down payment or dependent care, also factor into the financial picture. Each family’s circumstances dictate the order and allocation of funds.

Understanding College Costs and Financial Aid

Understand college costs by distinguishing “sticker price” from “net price.” Sticker price includes published direct costs: tuition, fees, and room and board. Net price is the actual amount paid after grants and scholarships, which do not require repayment. Beyond direct charges, account for indirect costs like books, supplies, personal expenses, and transportation. These can add thousands annually.

Financial aid has two main categories: “gift aid” and “self-help aid.” Gift aid, like grants and scholarships, reduces the amount a student pays or borrows. Self-help aid includes student loans (repaid with interest) and work-study programs (earn funds through employment). The Free Application for Federal Student Aid (FAFSA) determines eligibility for federal, state, and institutional aid. Some private colleges may also require the CSS Profile, which collects more detailed financial information.

FAFSA and CSS Profile formulas calculate a family’s financial capacity, resulting in the Student Aid Index (SAI), formerly Expected Family Contribution (EFC). The SAI indicates aid eligibility, not necessarily the amount a family will pay. Calculation considers income, assets, and family size. Parent-owned assets, like 529 plans, are assessed at a lower rate (up to 5.64%) than student-owned assets (20%). Retirement accounts (401(k)s, IRAs) are not counted in federal financial aid calculations, benefiting families prioritizing retirement.

Exploring College Savings Vehicles

Several specialized accounts offer tax advantages for college savings. A 529 plan (Qualified Tuition Program) is a state-sponsored vehicle allowing tax-deferred growth and tax-free withdrawals for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, and equipment for enrollment. Room and board are also qualified if the student is enrolled at least half-time.

529 plans can also be used for K-12 tuition (up to $10,000 per student annually) and certain apprenticeship programs. Funds can also repay up to $10,000 in qualified student loans per beneficiary.

The Coverdell Education Savings Account (ESA) offers tax-free growth and withdrawals for qualified education expenses, similar to a 529 plan. However, Coverdell ESAs have lower annual contribution limits ($2,000 per beneficiary) and income restrictions for contributors, with phase-outs for higher earners. Coverdell ESA qualified expenses are broader than 529 plans, including K-12 and higher education costs.

Custodial accounts (UGMA/UTMA) are another way to save for a child’s future. Assets are irrevocable gifts to the minor, who gains full control upon reaching the age of majority (typically 18 or 21). Unlike 529 plans or Coverdell ESAs, UGMA/UTMA accounts lack education-specific tax advantages, and earnings are taxed at the child’s rate. Because these assets are student-owned, they are assessed more heavily in financial aid calculations than parent-owned assets.

Roth IRAs, primarily retirement vehicles, offer flexibility for college funding. Contributions can be withdrawn tax-free and penalty-free anytime, regardless of age or purpose. Earnings are also tax-free and penalty-free if the account is open for five years and the holder is age 59½ or older. For educational expenses, the 10% early withdrawal penalty on earnings is waived, but income taxes apply if the five-year or age 59½ rule is not met.

Taxable investment accounts, like brokerage accounts, offer maximum flexibility with no fund use restrictions. However, they lack education-specific tax benefits, and capital gains or dividends are taxed.

Developing Your College Savings Strategy

Develop a college savings strategy by assessing your current financial health. Confirm emergency fund stability, manage high-interest debt, and ensure consistent retirement contributions before college savings. These priorities create a secure family financial environment, indirectly supporting a child’s future.

Estimate future college costs using online calculators that factor in inflation. While covering 100% of costs is ideal, set a realistic goal, like a percentage of tuition or in-state public university costs, to make it attainable. This acknowledges that other funding sources, like financial aid or student income, will contribute to the overall cost.

Choose the most suitable savings vehicle based on financial circumstances, desired control, and tax benefits. Many families choose 529 plans for their tax advantages and favorable financial aid treatment. A Roth IRA can be considered for those prioritizing retirement, offering a dual-purpose savings vehicle. Taxable investment accounts offer ultimate flexibility without education-specific tax benefits, suitable for funds exceeding limits or for unrestricted access.

Consistent contributions, even small amounts, significantly impact long-term savings growth due to compounding. Regular contributions, monthly or annually, build a substantial college fund over time. Flexibility in your savings plan is important, allowing adjustments as financial circumstances change due to income fluctuations or unexpected expenses. A comprehensive college funding plan integrates savings with other resources: scholarships, grants, work-study, and student loans, recognizing savings as one component of a broader strategy.

Citations:
“How Does a 529 Plan Affect Financial Aid?” Saving for College, savingforcollege.com/article/how-does-a-529-plan-affect-financial-aid. Accessed 29 Aug. 2025.
“529 Plans: Qualified Higher Education Expenses.” IRS, www.irs.gov/pub/irs-pdf/p970.pdf. Accessed 29 Aug. 2025.
“Publication 970 (2023), Tax Benefits for Education.” IRS, www.irs.gov/pub/irs-pdf/p970.pdf. Accessed 29 Aug. 2025.
“UGMA & UTMA Accounts: What They Are & How They Work.” Investopedia, www.investopedia.com/terms/u/ugma.asp. Accessed 29 Aug. 2025.
“Roth IRAs.” IRS, www.irs.gov/retirement-plans/roth-iras. Accessed 29 Aug. 2025.