How Much to Save for College

Out of the millions of students who graduate from high school in the U.S. each year, about 61% go on to attend college. While going to college has become common, figuring out how to pay for it remains a major challenge, especially as tuition costs rise. But don’t get discouraged; saving for college isn’t out of reach. With realistic goals and a solid plan, you can make a dent in the cost and reduce the need for student loans. 

Determine the true cost of tuition

Before you can start saving for college, it’s important to understand what you’re actually saving for. Tuition can vary widely based on the type of school you’ll be attending and how much financial aid you receive. In general, community colleges or two-year programs cost much less than a four-year university. Similarly, in-state public colleges tend to be far more affordable than out-of-state private schools. 

The average tuition and fees for the 2022-2023 school year were $9,800 for public four-year universities, $18,200 for private for-profit institutions, and $40,700 for private nonprofit four-year universities. While there's typically a huge cost difference between public and private colleges, a higher price tag doesn't necessarily mean a better education. Understanding the true cost of tuition can help you set a realistic savings plan and explore options that fit your educational goals and budget. 

Figure out your college costs

Tuition is only one portion of the actual cost of college. In college, you will also need to budget for your housing, transportation, room and board, books, supplies, food, and furnishings for your dorm. Deciding if you want to live on-campus or commute from home will affect your total costs. How you plan to spend your time outside of class – whether it’s working a part-time job, practicing with the marching band, or playing your sport – can also play a role in how much you will need to save up. 

During the 2023-2024 school year, the average cost of attendance for a full-time undergraduate student was $19,860 for a public, two-year school; $28,840 for a public, four-year, in-state college; $46,730 for a public, four-year, out-of-state school; and $60,420 for a private, nonprofit, four-year college. 

While those college prices may seem lofty, don’t worry. Filling out the FAFSA (Free Application for Federal Student Aid) is a key first step toward qualifying for grants, work-study programs, and low-interest loans. Applying for scholarships, like the 1st Financial Bank USA Financial Goals Scholarship, can also help reduce how much you need to save or borrow. With the right planning and support, college can be within your reach.

How much should you plan to save?

There is not a magic number to the question, ‘how much should I save for college?’ The amount you should save is specific to your lifestyle and preferences. It also depends on your timeline, your income, and your university plans. 

One generic rule of thumb is the one-third rule. This rule involves saving one-third of your expected college costs ahead of time. Another third of your costs could be covered through current income, such as a work-study or summer job. The remaining third of the costs could be covered by future income, like loans or scholarships. For example, if one year at a four-year school costs $21,000, you or your parents should aim to have at least a third (or $7,000) saved up before each school year. 

However, the goal of saving one-third is just a guideline. Some people may save more and need to borrow less. Others may not save as much and be inclined to borrow more or opt to go to a less expensive college. Your timeline also plays a big role. If you or your parents began saving in elementary school, those small monthly contributions can add up significantly. If you started in high school, you may need to save more aggressively to meet your goal. 

Best ways to save for college

There are several smart options to build your college savings over time. Some accounts offer tax advantages, while others provide more investment options or flexibility. Here are a few of the most popular and effective ways to save and invest for college:

529 college savings plan

A 529 college savings plan is a tax-advantaged investment account designed to help families save for college and other post-secondary education. These plans can be used to pay for tuition, fees, books, and other qualified education expenses at a variety of schools. 

One of the biggest advantages of a 529 plan is that your money grows tax-free, and when you use it for qualified education costs, your withdrawals aren’t subject to federal income tax. There are also no income limits for contributing, which makes it a flexible option for long-term college savings. Another benefit is that if you don’t end up using all the money in the account or decide not to attend college, you can usually change the beneficiary to another eligible family member, such as a sibling. This flexibility helps ensure that the money can still be used for education, even if plans change.

Education savings account

An education savings account (ESA) works a lot like a Roth IRA, except it’s specifically designed for education expenses. An ESA allows you to invest up to $2,000 per year per child. The money in the account grows tax-free and can be used for K-12 private school tuition, vocational schools, or things like textbooks.

One major advantage of an ESA is its potential for higher returns compared to a traditional savings account. You can choose from a variety of investment options, which means your money has more opportunity to grow over time. However, there are some limitations. To contribute to an ESA, your income must fall below a certain limit, and the annual contribution cap is relatively low compared to other college savings plans. Still, for families who qualify, an ESA can be a valuable tool for funding education.

Custodial account (UGMA/UTMA)

A custodial account is a type of investment account designed to hold and protect assets for a future college student. The investment account is set up to benefit a minor but is controlled by an adult custodian, such as a parent, guardian, relative, etc., until the child reaches adulthood. These accounts are typically set up under laws known as UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act).

Once the child reaches the age of majority, the assets in the account legally transfer to them, and they gain full control of the account. This means they can use the funds however they choose. They’re also responsible for paying any taxes on income earned from investments in the account. Custodial accounts don’t offer the same tax benefits as specialized college savings plans, but they are an option for families looking to invest in a child’s future. 

Traditional savings account

A traditional savings account is a place to safely hold your money and save for the future. As a parent or student, a regular savings account is easy to open and manage. One major benefit is flexibility. Should you decide not to attend college, the money can still be used for anything else you might need. 

While regular savings accounts are simple and secure, there are a few trade-offs. Traditional savings accounts usually have low interest rates compared to other savings vehicles, which means your money won’t grow much over time. Unlike specialized college savings accounts, regular savings accounts don’t come with any tax advantages. Because of this, they’re often best suited for short-term savings goals, like covering next semester’s expenses or building an emergency fund, rather than long-term college planning.

Prepaid tuition plan

Some states offer a prepaid tuition plan, which lets families lock in current tuition rates at participating public colleges. This can be a smart way to protect against the rising cost of tuition, since the value of the plan grows over time. Plus, when you’re ready to use the money for tuition, the withdrawals are typically tax-free. 

However, there are few limitations to keep in mind. Prepaid tuition plans usually don’t cover other major expenses like room and board. They often come with less flexibility, especially if you decide to attend a private or out-of-state school. These plans usually require that the student or account holder be a resident of the state offering the plan. Lastly, not every state has a prepaid tuition plan available.

When should you start saving for college?

The short answer is now. The sooner you begin saving, the better the outcome. Starting early gives your money more time to grow due to the power of compound interest, which is the interest you earn on top of interest. Small amounts saved regularly can add up to a significant sum in the long run.

That being said, if you haven’t started saving yet or feel like you’re behind, try not to get discouraged. It is never too late to begin, and every dollar you save still makes a difference. Whether you’re starting at age 10 or 20, the key is to take the first step to build consistent saving habits. 

How can you contribute?

Sometimes, your parents may feel pressure to cover all of your college expenses. However, that’s not always realistic, especially if there is more than one child attending college at the same time. As a student, you can lessen the burden on your parents. This may look like taking your time to write quality scholarship essays, using your summer breaks to work, or starting a side hustle to supplement your college income. 

By contributing in these ways, you are helping ease the financial strain on your family and taking ownership of your education. This sense of responsibility can help you be more intentional about how you spend your time and money in college. Additionally, being involved in the financial aspect of college can help you build important life skills, such as budgeting, goal-setting, and time management. These skills will serve you well beyond your college years. 

Saving for college may seem like a huge challenge, especially when you’re juggling classes, assignments, and possibly a part-time job. The good news is that you don’t have to save everything at once. By understanding your options and staying consistent, you can build adequate savings over time.