5 tips to help you save for college

Most parents know the value of a college education. In fact, 87% of parents believe a college degree will create opportunities that the student wouldn't have had otherwise, and 83% 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 $58,000 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."

A good place to start is by identifying a goal 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 invest for future 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, families could aim to cover 50% to 60% of college costs with income and savings, with the remainder coming from grants, scholarships and borrowing if necessary.

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 use of 529 education savings plans for college investing is increasing, says Polimeni — between 2008 and the third quarter of 2024, plan assets grew from $88.5 billion to $502 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.

In addition to using federally tax-free withdrawals for qualified education expenses, including tuition, fees, room, board and other education-related expenses, you can also take a 529 plan distribution, federally tax-free, and use it 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. Note that 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, you may not know this, but a designated beneficiary can roll over unused 529 assets to a Roth IRA when certain criteria are met; this is subject to limitations, including a lifetime limit of $35,000.Footnote ⁴ Learn more about this and other lesser-known benefits of 529 plans.

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 resorting 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."

"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.

Sixty-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 the College Savings Foundation (CSF).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.