How To Save for Your Kid’s College Fund

Raising kids is expensive. On average, the expenses of one child from birth to age 17 add up to over $300,000, according to the latest data from The Brookings Institution. That doesn’t even account for the massive expense of postsecondary education. Having a college fund for kids is generally a surefire way to help transition your children to successful adulthood. Need to know how to save for your kid’s college fund? 

The Cost of Going to College

According to a U.S. News annual survey, the average tuition for the 2022-2023 school year ranged from $39,723 (for private colleges) to $10,423 (for public, in-state colleges). And unless something changes in how people pay for education, college costs will only keep rising.

College costs tend to increase at about two times the rate of inflation each year; a trend that is expected to continue for the foreseeable future. Here’s what you can expect to pay for each year of tuition, fees, and room and board by the time your kids (or grandkids) are ready to head off to college (assuming a steady 6% college cost inflation rate):

If you’re looking into ways to save for college, here are some options:

How To Save for Your Kid’s College Fund

Saving for your kids’ college funds is a wise financial decision that requires careful planning and dedication. Here are some practical steps you can take:

Start Early

The earlier you start saving, the more time your money has to grow. Ideally, the best time to start a college fund is when your child is born. With compound interest and regular investments made monthly or yearly, the funds have an opportunity to grow over a longer period of time, and you don’t need to put aside as much each month or year to reach your savings goal. 

Understand the Costs

The cost of college can include a variety of items including some you might not expect. By understanding college costs, you can compare schools and explore options for how to lower your costs. This will give you a target savings amount.

Choose the Right Savings Vehicle

If you want to start saving for college for your child early on, these savings vehicles can help you invest money in your child’s future education. Explore tax-advantaged accounts like 529 plans, which offer potential tax benefits and flexibility for education-related expenses. Coverdell Education Savings Accounts (ESA) are another option to consider. 

Automate Savings

Setting up automatic deposits into your college savings account will allow your savings to grow. Each monthly deposit will increase your total amount saved, and compound interest will provide even more savings. Set up automatic saving now to allow your account to grow as much as possible and  ensures consistent contributions and reduces the temptation to spend the money elsewhere.

RELATED: Which is Better for College Savings: 529 or UTMA

Encourage Family Contributions

Inform grandparents and other family members about your college savings goals. They may be willing to contribute for birthdays, holidays, or other special occasions. For a birthdays, include the link to your child’s gift page in your digital party invitation and explain in a short note that making a contribution to the 529 savings account is an option if they want to give a gift.

Invest Wisely

Consider a diversified investment strategy based on your risk tolerance and time horizon. Many college savings plans offer various investment options. Regularly review and adjust your investment strategy as needed.

RELATED: 7 Ways To Teach Your Kids Good Money Habits

Explore Scholarships and Financial Aid

Keep an eye on potential scholarships or financial aid opportunities. Getting a college grant means free money. While these won’t replace your savings, they can help offset some of the costs. 

Where Should You Invest Your Money?

529 Savings Plans

If you’re investing for college you should consider opening a 529 savings plan or a state-sponsored investment account exclusively used for investing for school. With 529 savings plans, individuals can use the money they withdraw for college and K-12 tuition and other qualified educational expenses without paying income tax on any investment gains.

529 savings plans contain a variety of different funds such as mutual funds, bonds funds and ETFs. They are generally recommended for investing for college because of the tax benefits people get from them: You can contribute up to $15,000 tax-free (for single tax-filers) and your earnings will grow tax-free.

Traditional and Roth IRAs

You might also consider investing your money in a Traditional and ROTH IRAs.  An IRA is a tax-advantaged savings account where you keep investments such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can adjust the investments as your needs and goals change.

RELATED: How to Maximize the Benefits of Your Retirement Account

Custodial Accounts

Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to put money and/or assets in a trust for a minor child or grandchild. As the trustee, you manage the account until the child reaches the age of majority (18 to 21 years of age, depending on your state). Once the child reaches that age, they own the account and can use the money in any manner they wish. That means they don’t have to use the money for educational expenses.

Bottom line

The cost of college is rising rapidly, however, parents should start saving as early as they can so they can reap more profits from their investments.

Once parents determine what percentage of their child’s college education they’re willing to pay for, they can create a plan for their monthly contributions. They’ll have the option of investing in a 529 savings plan, a brokerage account or a prepaid tuition plan, but they’ll likely get the most tax benefits and flexibility from a 529 savings plan.

Remember that every family’s financial situation is unique, so it’s essential to tailor your plan to save for your kid’s college fund to fit your specific needs and circumstances. Regularly review and adjust your strategy as your family grows and your financial situation evolves.