Saving for your child’s college years

College graduation likely brings to mind proud families and celebrations. After all, a college education can open the door to higher wages and greater job stability.¹ While graduation may feel like a starting point, as students walk across the stage to accept that diploma, many are taking the final steps of a journey that started the moment they were born — when their parents began planning how to fund their college education.

College costs in the U.S. have been rising for years and show no sign of slowing down. According to data reported to U.S. News in an annual survey, the average cost of tuition and fees for the 2022-2023 school year is $39,723 at private colleges, $22,953 for out-of-state students at public schools, and $10,423 for in-state residents at public colleges.² Student loans can help cover those costs, but with careful planning, you can reduce the amount of money you’ll need to borrow.

Here are some tips to help you get started.

First things first, make a plan

Developing a savings plan as early as possible to pay for higher education is just smart parenting. It may feel weird to think about college before your child has started pre-kindergarten, but time goes quickly and your little one will be picking out universities before you know it. Saving for college is like training for a marathon — with discipline and a smart plan, you have a greater chance of crossing the finish line having met your goals.

Put interest to work

Time is your secret weapon when saving for college. Thanks to the power of compounding interest, setting aside just $200 each month starting when your child is born could add up to $68,000 in college savings in 18 years.³ And growing that savings discipline early on can spare you considerable stress years from now (but remember, you’re going to be taxed on those earnings).

Get the 411 on the 529

Look into a 529 savings plan. Created by the government, it’s a tax-advantaged way many states offer to save for college tuition.^4,5 You set aside money in the plan from your already-taxed income, but the interest that money collects isn’t taxable. And when you eventually withdraw the money, it won’t be counted as taxable income if it’s spent on eligible education expenses. Other benefits include tax deductions or credits in some states, high contribution limits, and the ability to front-load contributions.⁶ And, if your child doesn’t use all the funds, you can change the beneficiary. Just know you can only have one beneficiary at a time.

Similarly, a Coverdell account offers many of the same features as a 529 plan, but applies to elementary and secondary schools, too. There are stipulations, contribution limits, and age ranges on each type of savings plan — and even on the variety of investments you can pursue — so look to a professional for help.

Consider life insurance

Whole life insurance is valuable protection for any family in the event of a parent’s death, but it also can serve as a college-funding option, depending on the size of the policy and how early you take it out.^7,8 It provides guaranteed cash value returns and when your child turns 18, you can withdraw the money or borrow against it to help pay for college. Also, life insurance policies don’t count as assets when colleges analyze your need for financial aid.

If you’re thinking of using life insurance to help pay for college, you’ll want to get the policy when your kids are young, so you have a meaningful amount of cash value when the time comes. If whole life insurance isn’t in your budget, you also can consider term life insurance, which is typically less expensive than whole life insurance, so you can take out a larger policy with a death benefit to cover expenses like tuition. A financial professional can work with you to determine what you can afford. And to get started on your own, our resources can help you learn about using life insurance to save for college.

Involve the grandparents

If they’re in a financial position to do so, encourage grandma and grandpa to make an early graduation gift: regular funding of a college savings plan. Contributing just one Social Security payment a year into a 529 plan could help build your tuition fund — and could be beneficial for their tax strategy as well. Grandparents may also gift money tax-efficiently to pay for a whole life insurance policy for their grandchildren to ensure they’re protected.

Work with a college advisor

It’s important to know what types of financial aid need to be paid back and which don’t. Grants, awards, and scholarships help fund your child’s education, and a professional college advisor can help you navigate the options and apply for the assistance available.

Certified advisors charge for their help researching colleges, filling out admissions forms for financial aid, and interpreting the financial aspects of acceptance and award letters. Different schools may have school-specific admissions forms for financial aid. A college advisor can help you fill out your college scholarship service profile (CSS) for non-federal financial aid, and your free application for federal student aid (FAFSA^®). If you’re able to, working with an advisor can be invaluable.

Think outside the box

In-state public colleges are often more affordable, but there may be significant grant and scholarship funding available at lesser-known private institutions. And while you may think of scholarships as just for athletes or academically qualified students, there are many kinds out there. There may be awards for college-bound students within your specific community, religious group, or social group. Even if you don’t hire a professional college advisor, your own research can pay off, pointing your child in directions they might not have pursued otherwise.

With enough research, you may also uncover some non-traditional methods of putting money away for college, such as linked credit cards, which reimburse you at 2%, payable directly into your 529 account.⁹ This is the time to leave no stone unturned.

Consult a financial professional

When in doubt, work with a professional early on. A financial strategy can help you put away money in gradual, less noticeable increments, while still allowing you to plan for life’s other expenses. A financial professional can help navigate different options to fund your child's education and help you properly declare all your assets on financial aid forms. They also can help you sort through the savings and tax implications of various college savings plans.

Whatever methods you use to save for college, don’t forget to check in on them annually. Many government limits, including income ceilings and tax allowances, do change over time — often for the better. By saving for your child’s education, you’re making an investment in their future.