The rising cost of college tuition can make you feel like you’re climbing an insurmountable mountain, but with a solid plan, realistic assumptions and consistent effort, funding your child’s college in 18 years is an achievable goal. 

This guide will help you allow your child to pursue their dreams without the burden of student loan debt. 

Decoding College Costs

To create a plan, first you need to understand the numbers. 

The average annual cost to attend college is $38,270 per student, according to the Education Data Initiative. Of course, the amount could be higher or lower, depending on whether your child attends a public university or a private college. 

You also have to factor in inflation.  

College tuition generally increases at about twice the rate of general inflation. A rule of thumb is an annual 8% increase in tuition.

The average annual in-state tuition to attend a public four-year college is $9,750, while the out-of-state tuition increases to $28,386. 

When you factor in fees, books, supplies and room and board, the cost of attendance for an in-state student jumps to $27,146 per year for a four-year total of $108,584. Factoring in inflation over the next 18 years, the cost of your child’s college education would be $433,904.

Out-of-state students pay $45,146 per year or $182,832 over four years, or $730,600 in 18 years.

Private schools are even more expensive. 

For a private, nonprofit school, the cost of tuition is $38,421 per year — $226,512 over four years, or $905,146 in 18 years. 

Reaching Your Target

For college savings, a diversified investment portfolio typically aims for an annual return of 5% to 7% over the long term. Returns are not guaranteed and likely will fluctuate with market conditions. We’ll base our calculations on a 6% return. 

You’ll need to save almost $1,200 per month over the next 18 years to put your child through a four-year public school as an in-state student. 

For out-of-state tuition at a public university, that amount rises to nearly $2,000 per month. 

You’ll need to save $2,440 per year to send your child to private school.

Tools For College Savings

Choosing the right accounts for maximizing growth is key. Take a look at some of the strategies you can use to save for your child’s college education.

529 Plans

529 Plans are state-sponsored investment plans designed for education expenses. Funds grow tax-deferred, and qualified withdrawals are tax-free at the federal level.

• Pros: These plans offer tax-free growth and withdrawals for qualified education expenses. They have high contribution limits, and the account owner retains control. There is minimal impact on financial aid, and the funds can be used for college, K-12 tuition and student loan repayments.

• Cons: Nonqualified withdrawals are subject to income tax and a 10% penalty on earnings. Investment options are limited to what the state plan offers. State tax benefits may only apply to your home state’s plan.

Roth IRA

While Roth IRAs are primarily retirement accounts, they offer flexibility for college savings. Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

• Pros: Contributions can be withdrawn tax- and penalty-free any time for any reason. Earnings can be withdrawn tax- and penalty-free if used for qualified education expenses, even if you’re younger than 59½, provided the account has been open for at least five years. It offers more investment options than most 529 plans and doesn’t count against financial aid as an asset until withdrawals are made, and then it’s considered student income.
  
• Cons: At $7,000, annual contributions are significantly lower than 529 plans. Using it to pay for college means less money for retirement. Earnings are subject to income tax and a 10% penalty if withdrawn for nonqualified expenses before age 59½ and the account is less than 5 years old.  

Custodial Accounts 

Custodial accounts, like the Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act, are investment accounts where a custodian — usually a parent — manages assets for a minor until they reach the age of majority, which is 18 or 21, depending on the state. 

• Pros: Flexible use of funds — not just for education — and no contribution limits.
  
• Cons: The funds legally belong to the child, who has full control at the age of majority. Assets are counted heavily against financial aid — up to 20% of the child’s assets. Earnings are taxed at the child’s tax rate, but “kiddie tax” rules apply to higher earnings. 

High-Yield Savings Accounts 

High-yield savings accounts, or HYSAs, are bank accounts that offer significantly higher interest rates than traditional savings accounts. 

• Pros: HYSAs are FDIC-insured up to $250,000, low risk and make it easy to access funds. They’re good for short-term savings of funds needed in the near future.
  
  
• Cons: Returns are generally lower than investment accounts and may not keep pace with college tuition inflation. They’re not ideal for long-term college savings because of their lower growth potential. 

Mapping Out Your Strategy

Saving for your child’s college education should be approached in a similar manner to how you save for retirement. In the early years, you should prioritize an aggressive investment strategy to maximize growth potential, but as the day your child will start college gets closer, you should focus on conserving capital.

In the first five years, you should have an aggressive investment strategy with a higher stock allocation in your 529 plan. Automate your contributions to make sure you reach your target savings goal, and annually review your investment performance. 

For years six through 12, you’ll want to follow a moderate investment strategy. Your investments should continue to grow as you gradually reduce risk. Keep most of your funds in a 529 Plan and slowly increase bond allocation. 

Over the next five years, as your child approaches college age, you should preserve capital by shifting your investments to mostly bonds and cash equivalents. 

Closing The Gap Faster

If you want to get to your college savings goal faster, several strategies can boost you fund. 

Increasing your contributions, even by small, consistent amounts, allow you to leverage the power of compounding. 

Make automatic transfers to your college savings accounts, and whenever you receive a windfall such as a bonus, tax refund or inheritance, put theme straight into your college fund. 

Encourage your friends and family to make contributions to the fund for special occasion gifts. 

You can also consider more affordable college options, such as having your child start at a community college before transferring to a four-year institution or going to a public, in-state university. 

And remember, there’s nothing wrong with encouraging your child to contribute by saving money from part-time work during high school and college.

Frequently Asked Questions