Saving for college can be a major endeavor considering how much higher education costs. The average cost of a 4-year institution in 2021 is $25,615 per academic year. That price is rising, making it essential that you start saving for college as early as possible. It’s also important to factor in other considerations, like whether you will attend a private or public school, an in-state or out-of-state institution, and whether or not you’ll pursue (or qualify for) financial aid and scholarships.
Knowing how to save enough for college means understanding some of these factors, but it also means being disciplined in regularly setting money aside for your goal. We’ll take a look at some of the most effective strategies for saving enough for college.
Deciding how much to save for college
The first step in saving enough for college is to determine how much money is enough. You can estimate the costs by using a cost projection calculator online. Once you have a projected cost, you can also consider how financial aid and scholarships may play a role. In general, financial advisors recommend that people save about one-third of the projected cost of college as the remainder will usually come from those other sources of funds.
Once you have a solid number to aim for, you can begin to budget in a way that allows you to set aside a monthly amount to save. Looking at the total amount can cause sticker shock, but breaking it down into monthly savings targets is much easier to swallow.
Strategies to save enough for college
Saving for college is not rocket science, but it does require discipline. There are several ways in which to set aside money for college, and we’ve outlined a few of them below.
Open a 529 plan — A 529 plan is a savings plan sponsored by the state government that can be used to save for future education costs. These accounts are tax-friendly, so contributions can usually be deducted from state income tax. Also, when the money is withdrawn to be used for college, the money is not taxed. You do not have to live in the state of the plan you use, so someone living in Ohio can use Illinois’ 529 plan.
Put money in savings bonds — Savings bonds are advantageous because they’re guaranteed by the government and very low risk. Because they are low risk, that also means the interest earned is fairly low. For example, Series EE savings bonds are currently earning an annual fixed rate of 0.10%.
Contribute to a Roth IRA — Many people do not realize that Roth IRAs can be good savings vehicles for higher education in addition to retirement. When you reach 59 ½ and you have contributed to the Roth IRA for at least five years, your withdrawals are tax-free.
No matter which savings route you choose, the earlier you start setting money aside, the better. Planning ahead is a win-win and can ensure that you meet your goals.