Raising children has many challenges and the focus is typically on day-to-day living. Questions like these may run through a parent’s mind: Are we in a good school district? Does my child need additional services or support? What activities should they participate in? Getting through each day has its struggles and successes. Then, before you know it, your children are grown up and talking about which college to attend.
Preparing for college isn’t just about academics—it’s also a financial goal. And like most financial goals, the earlier you start, the more options your child will have when it’s time to choose a school. We talk about the time value of money as it relates to retirement planning and college planning is no different. Saving for college should start sooner rather than later, as the cost of education is a very steep hurdle. Lack of preparation will lead your child (and maybe you) to accumulating significant debt. It is not unusual to see graduates carrying mortgage-like loans into their working life. Looking ahead can help to eliminate or minimize taking on educational debt.
The average cost of college for the 2024–2025 academic year is $30,780 for public colleges and $62,990 for private colleges. Some state schools now cost as much as $48,000 per year, and private colleges can reach $80,000 to $90,000 annually. These figures reflect undergraduate programs only—graduate degrees can add significantly to the total cost. Because of the rising expense, many families consider starting at a community college, where tuition is a fraction of the cost of a four-year institution.
529 PLANS: A Powerful College Funding Tool
529 plans remain the best savings vehicles for college education and other post-secondary training. While 529 plans can also be used to cover up to $10,000 per year in tuition for elementary, private, or religious schools, this article will focus on saving for college.
A 529 plan is established through a state and designates a beneficiary. If the funds are used for “qualified education expenses,” the earnings grow tax-free. Additionally, if you live in the same state where the plan is established, you may be eligible for a state income tax deduction on your contributions. Each state has different rules, so it’s important to check your state’s guidelines before setting up a plan.
There are two types of 529 plans: prepaid plans and savings plans. Prepaid plans allow you to lock in tuition rates through fixed lump sum or monthly payments, but are typically limited to specific geographic areas and cover tuition only. Savings plans, on the other hand, are market-based and grow based on contributions and investment performance. They can be used at most U.S. colleges and universities, and some international institutions as well.
529 plans can be opened by parents, grandparents, relatives, or even friends. Contributions are considered gifts, so be mindful of annual gift tax limits. If the original beneficiary doesn’t use the funds, the plan can be transferred to another eligible family member.
PUBLIC SCHOOL FUNDING
Assuming you open a college savings account when your child is born, you would need to save about $750 per month to cover four years of college at $30,780 per year (the current average cost of a state school). This calculation assumes college costs rise 5% annually and your savings earn a 7% annual return.
If you wait six years to start saving, you’ll need to set aside approximately $975 per month—an increase of $225 each month. That’s the cost of procrastination.
To fully fund four years of college with a lump sum today, you would need to invest around $105,000.
PRIVATE SCHOOL FUNDING
To fund a private college education starting at birth, you would need to save about $1,525 per month. This assumes four years of college at $62,990 per year (the current average cost of a private school), with college costs rising 5% annually and your savings earning a 7% annual return.
If you wait six years to begin saving, you’ll need to contribute approximately $2,000 per month—an increase of $475 per month. Waiting to fund a college education can be expensive.
To fully fund four years of private college with a lump sum today, you would need to invest around $215,000.
ACTION ITEMS
As you can see, the numbers are significant—even if you start saving at birth. The most important takeaways are:
- Start saving for education as early as possible, and consider opening a 529 plan through your state.
- Set savings goals, even if you can’t meet the ideal target. Contributing something is better than waiting.
- Review your contributions annually and look for opportunities to increase the amount you’re saving.
- Apply windfalls—such as cash gifts or work bonuses—toward your education fund to help boost your regular savings.
- Involve grandparents. They are often key contributors to education funding, so let them know if you’ve opened a 529 plan.
We can help you build a long-term strategy to meet your education funding goals—alongside your broader financial plan.
Sources:
529 Plans: Questions and answers | Internal Revenue Service
Average Cost Of College 2024-2025 | Bankrate.
eMoney Advisor College Projections:
https://acrobat.adobe.com/id/urn:aaid:sc:US:4e50bf01-84e9-410c-a258-19a7d58ecf81
https://acrobat.adobe.com/id/urn:aaid:sc:US:2ac66f6a-a5b2-4d41-b458-fb0c863b7923
https://acrobat.adobe.com/id/urn:aaid:sc:US:c6ad96bd-acda-4e5c-acca-7da7de16138b
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