How to save for college

College is one of the biggest expenses parents will face when raising children. The average college education costs a whopping $35,551 a year, so parents can expect to spend more than $140,000 for a four-year college degree, absent any student aid or loans.

Like most big expenditures, it pays to plan ahead when it comes to preparing for college costs. The earlier you start to save for your child’s education, the better.

When to start saving for college

The old adage about the best time to start something being yesterday holds true when it comes to saving for college. You should start saving for college as soon as you can. The longer your money stays invested, the more time it will have to compound. Many parents start saving as soon as a child is born, and some may start even earlier than that.

“A parent, grandparent, guardian or really anybody else who wishes to fund to that child’s future educational expenses should start, in my opinion, right away — if not when they’re born,” says Joseph Voellm, a certified financial fiduciary at JL Smith Group in Avon, Ohio. “This would allow the money to grow and compound over time to meet that future.”

Deacon Hayes, a personal finance speaker and podcaster, advises parents to tell loved ones about their college savings plans. “If you have a birthday party for your kid, one thing you could do is ask for money towards your kid’s college instead of gifts. You could do this by using an app where you would share a link for contributions or simply ask for cash.”

How much to save for college each month

Figuring out how much to save for college is difficult. The costs can vary widely depending on whether a student goes to a public or private university, the amount of financial aid awarded and the cost of living in the area around the school.

Still, calculating the cost of an education is important to determine how much you’ll need to pay for college, Hayes says. “Then you need to determine if you will pay for the whole thing or just a portion of (your child’s) college expenses. This will be helpful in determining how much money you should invest each month in a qualified college savings plan like a 529.”

Though you can’t control all of your children’s choices, one way to make costs more predictable or keep them low is to encourage them to look for scholarship opportunities or ways to live within a budget.

“From personal experience, most of the student loans I’m still paying back 10 years later weren’t due to tuition and fees as much as they were related to lifestyle,” says Amanda Clayton, a personal finance blogger, with experience with attending college in a high-cost area. “I was a first-gen college kid and had no idea how to budget for living expenses.”

Many top universities are located in high-cost living areas, adding to the challenge of saving for college, Clayton says. “I used to live in Washington, D.C., where rent is through the roof. I couldn’t afford to live in D.C. on a full-time salary. I can’t imagine being an undergrad in a city like that, footing the cost of both tuition and rent.”

Once you’ve estimated how much your child’s education will cost, you can decide how much to save. Some experts recommend saving only a third of the expected costs. The remaining two-thirds can be paid over a lifetime through loans, grants and future income, but you can aim to save more or less depending on your preferences.

What are the types of accounts for saving for college?

When it comes to saving for post-secondary education, there are several account types you can use.

Traditional savings account

Everyone should have a savings account, since they provide easy access to money you may need for emergencies or other unplanned expenses. But they’re a pretty poor choice for college savings (or other long-term purposes). This is because the interest paid on savings accounts is typically below inflation, so even if your money is safe, it’s losing purchasing power.

529s

A 529 plan is a tax-advantaged account designed to help pay for college. You won’t pay taxes on money withdrawn from a 529 as long as you use it to pay for educational costs. Some states even offer tax benefits when you add money to the account, which further sweetens the deal.

Also known as qualified tuition plans, 529s are a viable option for parents or guardians who feel certain their child will attend college. The tax benefits and investment options mean your savings can grow over time, but there are penalties for withdrawals used for noneducational costs. So, you could get hit with penalties if your kid skips college or earns a full ride and doesn’t need the savings, which is why many parents consider other options.

Coverdell education savings account

Coverdells are an alternative to 529 accounts. They’re more restrictive than 529s when it comes to contributions, allowing you to add just $2,000 to the account each year and only allowing contributions on behalf of children under 18.

But Coverdells are more flexible than 529s when it comes to withdrawals. You can use the money for tuition and fees as well as expenses like tutors, uniforms and other costs related to K-12 education, in addition to college expenses.

Prepaid tuition plans

Some state universities let parents prepay their children’s tuition, purchasing future credit hours at a predetermined price. If you know that your child will go to an in-state school, this plan lets you pay for school over many years without having to worry about investing, stock market swings or increasing education costs.

The obvious drawback is that these plans assume your child winds up going to an in-state school. If they want to go somewhere else, you might have to jump through some hoops to get the money transferred to the university they choose. Additionally, not all schools offer prepaid tuition plans.

UGMA and UTMA accounts

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts enable adults to give money to minors without allowing the child full control over the funds until they reach the age of majority. For tax purposes, money placed in these accounts is treated as a gift to the child and the child’s property, but parents can retain control over the money and how it is used or invested.

A portion of the gains in UGMA and UTMA accounts is tax-free, part of it is taxed at the child’s income-tax rate and the remainder is taxed at the parent’s income-tax rate. Plus, there are no restrictions on how the funds may be used as long as they directly benefit the child. That means they can be used for noncollege expenses, if your child chooses not to pursue higher education.

A potential drawback is that your child gets full control over the money when they reach the age of majority in your state — from 18 to 21. They can use the money for anything they want, including the ability to squander it.

Roth IRA

The primary purpose of a Roth IRA is to save for retirement, but you can withdraw funds from a Roth IRA to pay for nonretirement expenses, such as college. Roth IRAs are funded with post-tax dollars, and you can withdraw contributions — but not earnings — before you reach the age of 59½ without paying taxes or penalties.

Tapping into your Roth IRA to pay for college could help your child avoid relying on student loans, but going this route isn’t without potential drawbacks. For instance, Roth IRA distributions would be considered untaxed income on the next year’s Free Application for Federal Student Aid (FAFSA) — which could reduce a student’s eligibility for need-based financial aid.

Another reason to proceed with caution is more fundamental: Dipping into Roth IRA funds could delay your retirement.

Don’t sacrifice your retirement to pay for college

While you may wish to save as much money as possible to help your child graduate from college free of debt, it’s important not to let your retirement savings fall behind in the process. Not saving consistently in your 401(k) or IRA over the decades can end up forcing you to delay your retirement.

It can pay to strike a balance between saving for both college and retirement at the same time. Saving what you can for your child’s college only after you’ve put away a healthy amount for retirement each month can help keep you from needing to work later into your golden years than you’d prefer.

Bottom line

When children are young, it’s hard to predict what college they’ll aspire to attend — and whether they’ll even want to go to college. The best way to save an adequate amount is to start putting away money as early as possible. Developing a habit of saving consistently can also help you meet your goals.

Getting started with a college fund can be as simple as figuring out how much you can afford to devote to it every month and adding “college savings” as a line item into your budget. Then, decide what type of account is the best place for the savings, and open the account.

Whether you’re saving in a 529 plan, a Roth IRA, an UGMA or UTMA, or another investment account, don’t sacrifice your own retirement savings (or any other long-term savings that’s important to you) as a result of devoting money to the college fund.

A bit of planning and consistent saving can help remove some of the stress from the college years, for both your child and for yourself.