Saving for College: Smart Strategies Every Family Should Know (2025-26 Guide)
Wondering how to save for college? Explore the best college savings plans, including 529 accounts, custodial accounts, and expert budgeting tips to prepare for rising tuition costs.
Why Saving for College Matters
With college tuition rising every year, saving early is the best way to avoid excessive debt. Whether your child is a newborn or a high school student, putting aside money for education can significantly reduce the need for student loans later.
Key benefits of saving for college:
- Avoid or reduce student loan debt
- Take advantage of compound interest
- Reduce financial stress for you and your child
- Potential tax benefits through specific savings plans
How Much Should You Save for College?
The average cost of college in the U.S. (2025) is:
- Public 4-year in-state: ~$26,000/year (including room and board)
- Public 4-year out-of-state: ~$44,000/year
- Private 4-year college: ~$58,000/year
That means a 4-year degree could cost $100,000–$250,000.
However, most families don’t need to save the full amount. Financial aid, scholarships, part-time jobs, and grants can cover part of the cost. A good goal is to save one-third of expected college costs, and plan to cover the rest through other sources.
Best Ways to Save for College in 2025
Here are the most popular and effective college savings vehicles:
1. 529 College Savings Plans
What It Is: A state-sponsored investment account designed specifically for education expenses.
Why It’s Smart: Offers tax-free growth and withdrawals for qualified expenses like tuition, books, room and board.
Pros:
- Tax advantages, High contribution limits, Parent retains control, Can be transferred between siblings
Cons:
- Funds must be used for qualified educational expenses
- Investment risk (varies by plan)
Where to Start: Every state offers at least one 529 plan. You can use any plan regardless of where you live or where your child goes to college. Check out savingforcollege.com to compare plans.
2. Custodial Accounts (UGMA/UTMA)
What It Is: Investment accounts held in a child’s name, managed by a custodian until they reach legal age.
Pros:
- Flexibility — can be used for anything, not just college
- No contribution limits
Cons:
- Less favorable financial aid treatment
- The child gains control of the money at legal age
- Taxed at the child’s tax rate (kiddie tax may apply)
3. Coverdell Education Savings Accounts (ESA)
What It Is: A tax-advantaged account similar to a 529, but with lower contribution limits and more investment flexibility.
Contribution Limit: $2,000/year per child
Pros:
- Tax-free withdrawals for qualified education expenses (including K–12)
- Wider investment options than many 529s
Cons:
- Income restrictions
- Lower contribution limits than 529 plans
4. Roth IRA (for Parents)
What It Is: A retirement account that allows penalty-free withdrawals for qualified education expenses.
Pros:
- Dual-purpose: retirement + college
- Tax-free growth
- More flexibility if the child doesn’t go to college
Cons:
- Contribution limits ($7,000/year in 2025 if under age 50)
- May impact financial aid eligibility
College Saving Tips for Every Age
If Your Child Is a Baby or Toddler:
- Open a 529 plan now to take full advantage of compounding
- Set up automatic monthly contributions
- Ask family members to contribute as birthday or holiday gifts
If Your Child Is in Elementary School:
- Increase monthly savings as your income grows
- Explore prepaid tuition plans in your state
- Consider using windfalls (bonuses, tax refunds) for contributions
If Your Child Is in High School:
- Shift to more conservative investments to reduce risk
- Estimate college costs and compare schools
- Apply for scholarships and financial aid early
Common Mistakes to Avoid
- Waiting too long to start saving — even small amounts grow over time
- Using retirement savings for college — protect your future first
- Not researching 529 fees and options — plans vary widely by state
- Overfunding a custodial account — could hurt your child’s financial aid eligibility
How Saving Impacts Financial Aid
Savings in a parent-owned 529 plan are treated favorably in the FAFSA formula—only up to 5.64% of the asset’s value is counted in Expected Family Contribution (EFC). By contrast, student-owned assets (like UTMA/UGMA) count at 20%, reducing aid eligibility more.
Final Thoughts: Start Small, Stay Consistent
You don’t need to save thousands all at once. Starting early—even with just $25 or $50 per month—can make a major difference by the time your child heads off to college.
Set a realistic goal, automate your savings, and review your plan annually. With the right strategy, you can reduce or even eliminate the need for student loans.
Helpful Tools & Resources:
Related Articles
- What Is a 529 Plan and How Does It Work?
- Grants vs Scholarships: What’s the Difference?
- How Much Does College Really Cost in 2025?
- Should You Use Roth IRA for College Savings?
- How to Pay for College Without Loans