5 tips to help you save for college

Text size: aA aA aA
Paying for college doesn't have to break your budget. These tips can help.
Most parents know the value of a college education. In fact, 88% of parents believe a college degree will create opportunities that the student wouldn't have had otherwise, and 82% are willing to stretch financially to make those opportunities available. On top of that, those who may have only recently finished paying off their own college loans often have a strong desire to save more and borrow less when financing their children's college education.Footnote 1
Still, college requires a hefty investment. With costs averaging more than $50,000 per year for a private college,Footnote 2 parents are looking for ways to save more, says Richard Polimeni, managing director of Education Savings Programs at Bank of America. "The reality of college costs is a major concern for most parents," he explains. "But it's also a great motivator because they want their children's lives to be better — and free from the kind of college debt they themselves may have taken on and, in many cases, are still paying off."

The price of college today

The average cost of a single year at a four-year college or university, including tuition, fees and room and board, is high across the board.
In-state public $24,030
Out-of-state public $41,920
Private $56,190
Source: CollegeBoard, "Trends in College Pricing and Student Aid 2023."
If you're looking for ways to save more so your children can borrow less, consider these key tips.

1. Set a realistic savings goal

A good place to start is by identifying a savings plan that works for your finances. Our college savings calculator can help you prepare for the cost of higher education by determining how much you may need to save for college expenses.
Be realistic about the amount of college costs you can take on without jeopardizing your other financial goals and priorities, including retirement savings, Polimeni says. "We see a definite change from parents feeling that they have to finance 100% of college costs to realizing that there are a variety of other funding sources and strategies they can use in their saving efforts," he notes. "The objective should be to set a realistic goal that is achievable." For example, aim to cover 50-60% of college costs with income and savings, with the remainder coming from grants, scholarships and borrowing.Footnote 1 See how many families pay for college from a combination of financial resources.
Also, consider the benefits of starting early. The earlier you start saving and investing for a child's education, the more years you will have of potential growth through compound earnings. "Every dollar saved is one more dollar that you won't have to come up with — or borrow — later," Polimeni says.

The power of an early start

How contributing $200 a month to a 529 plan could add up if you start when your child is 1, 5 or 10, assuming a 6% average annual return.
Starting age Value at age 18
1 $67,711
5 $45,317
10 $23,754
Source: Investor.gov, "Compound Interest Calculator," accessed March 2024.

2. Take advantage of 529 benefits

The use of 529 education savings plans for college investing is increasing, says Polimeni — between 2008 and 2023, plan assets grew from $88.5 billion to $446.6 billion.Footnote 3 Generally, 529 plans offer the potential for tax-free growth, and any withdrawal (including any earnings) is federal (and potentially state and/or local) income tax-free if used for qualified higher education expenses. Although 529 plan contributions cannot be deducted from federal income taxes, many states offer residents a state income tax deduction for contributions to the in-state 529 plan. A few states offer a state tax deduction for contributions made to any 529 plan.
You can also take a 529 plan distribution, federally tax-free, and can use the distribution to make qualified student loan payments up to a lifetime maximum of $10,000 for the designated beneficiary or their sibling. The $10,000 limit is applied separately to the designated beneficiary and the sibling of the designated beneficiary. If the original beneficiary doesn't use all the funds, the account holder can name a new designated beneficiary, provided that the new designated beneficiary is a family member of the prior designated beneficiary. Otherwise, the change may be taxable. 529 assets can also be used to pay for certain apprenticeship costs, as well as up to $10,000 of eligible primary and secondary education costs per year. Also, starting in 2024, a designated beneficiary can roll over unused 529 assets to a Roth IRA when certain criteria are met.Footnote 4

3. Use bonuses, tax refunds and other windfalls

Don't forget to take advantage of these types of opportunities, including bonuses, tax refunds, earnings from hobbies and inherited money, to fill the college funding gap before they resort to taking out loans.
Parents whose children are "graduating" from day care to public elementary school have been using another great option, says Polimeni. "They take the money they have been paying every month for day care and redirect it into a 529 education savings plan. It is an easy way to start saving for education without impacting your lifestyle."
Parents take the money they have been paying every month from day care to public elementary school and redirect it into a 529 education savings plan.
— Richard Polimeni,
Managing Director of Education Savings Programs,
Bank of America
"When you find yourself in a situation where you suddenly have extra money every month that you're used to spending, it also can be helpful to set up a recurring automatic draft from your checking account to your 529 education savings plan account so you're not tempted to spend it on something else," says Polimeni.

4. Get a little help from friends and relatives

Forty five percent of parents would ask family and friends to contribute to their child's 529 plan in place of material gifts at birthdays, graduations and other holidays, according to a College Savings Foundation survey.Footnote 5
The number of grandparents who are helping to pay for a grandchild's education through payment of tuition directly to the college or contributions to 529 plans is also increasing, Polimeni says. This strategy can also be beneficial for the grandparent's estate and gift tax liabilities.

5. Share costs with your children

Increasingly, parents are expecting their children to take on a portion of the college costs — and today's high school students are willing to do so. In the CSF's Annual Youth Survey, 50% of respondents said they were saving for higher education.Footnote 6

Next steps

Footnote 1 Sallie Mae, "How America Pays for College 2023," August 2023.

Footnote 2 College Board, "Trends in College Pricing and Student Aid," 2023.

Footnote 3 ISS Market Intelligence, "529 Industry Analysis Report," December 2023.

To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. Qualified higher education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance of the beneficiary at an eligible educational institution; certain room and board expenses; special needs services incurred in connection with enrollment or attendance at an eligible educational institution; and computers or peripheral equipment, computer software, or internet access and related services that are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. The beneficiary must be attending an eligible educational institution at least half time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an elementary or secondary public, private or religious school. Qualified higher education expenses include expenses for fees, books, supplies and equipment required for the participation of a beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the beneficiary or sibling of the beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the beneficiary will count toward the lifetime limit of the sibling, not the beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school; apprenticeship expenses; and payment of qualified education loans.
Footnote 5 College Savings Foundation, "State of Higher Ed Savings Survey," November 2023.

Footnote 6 College Savings Foundation, "14th Annual Youth Survey," August 2023.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.