How to Save for College

College costs have risen about 5% per year for two decades — roughly double the inflation rate. A four-year public in-state degree now costs $115,000+ on paper for tuition, room and board. Private universities top $350,000. If your child is a newborn today and you wait until high school to start, you’ll miss most of the compounding window and end up funding college from cash flow or loans. This guide covers the 529 plan, Coverdell ESA, UTMA/UGMA accounts, age-based allocation strategies, projected future costs, and the often-overlooked impact of these accounts on financial aid. You’ll come out with a number to save per month and a structure to save it in.

1. Project the future cost

Start with today’s cost (College Board published average), then inflate at historical college inflation of ~5% per year:

future cost = today's cost × (1.05)^years to enrollment

Today’s public in-state 4-year total: ~$115,000. In 18 years at 5%: 115000 × 1.05^18 ≈ $276,000. Private: $700,000+. These are scary numbers, but aid, scholarships, and in-state discounts often cut the effective cost in half.

2. 529 plans are the default account

A 529 is a state-sponsored education savings plan with:

• Tax-free growth
• Tax-free withdrawals for qualified education expenses
• State income tax deduction or credit in 30+ states
• No income limits on contributors
• High contribution ceilings ($235k-$580k depending on state)

You don’t have to use your own state’s plan, but you may lose the state tax deduction if you don’t. Shop on fees (Utah and Nevada are consistently low) if your home state has no deduction.

3. What counts as a qualified 529 expense

• Tuition and required fees
• Room and board (on- or off-campus, up to school allowance)
• Required textbooks, supplies, equipment
• Required computers and software
• K-12 tuition (up to $10k/year per beneficiary)
• Apprenticeships and certain student loan repayment ($10k lifetime per beneficiary)

Not qualified: transportation, health insurance, extracurricular fees. Non-qualified withdrawals trigger income tax plus a 10% penalty on the earnings portion.

4. Coverdell ESAs

A less-common alternative:

• Annual contribution cap: $2,000 per beneficiary (all contributors combined)
• Income phase-out: $95k-$110k single, $190k-$220k married
• Must be used by age 30
• Broader K-12 flexibility than 529s historically, though 529s have caught up
• Broader investment options than most 529s (any brokerage-held asset)

The $2k cap makes ESAs supplemental. Most families use a 529 as the primary vehicle.

5. UTMA/UGMA accounts

Custodial accounts in the child’s name:

• No contribution limit
• No restriction on use (not tied to education)
• Kiddie tax: first ~$1,300 of unearned income tax-free, next ~$1,300 at child rate, above taxed at parents’ rate
• Becomes child’s money at age of majority (18-21 depending on state)
• Much worse for financial aid than a 529 (counted as student asset)

UTMA/UGMA made sense before 529s existed. Today they’re usually only preferred when you want flexibility on non-education uses.

6. Age-based 529 portfolios

Most 529 plans offer an age-based option that auto-rebalances from stock-heavy to bond-heavy as the child approaches college:

• Ages 0-5: 80-90% stocks
• Ages 6-10: 60-75% stocks
• Ages 11-14: 40-55% stocks
• Ages 15-17: 20-30% stocks
• Age 18+: 0-15% stocks

The goal is to have the money out of the market by the time tuition bills arrive. A stock crash in year 17 can shred a portfolio that never had time to recover.

7. How much to save per month

Rough calculation to cover a public in-state college for a newborn (18-year horizon, 7% net return, 5% inflation):

future cost ≈ $276,000
monthly savings needed ≈ $475/month

If you start at age 5, that jumps to ~$750/month. Age 10: ~$1,400/month. Age 15: $3,500+/month. Starting early is the whole ballgame.

8. Financial aid impact (FAFSA)

Under FAFSA rules:

• Parent-owned 529 counted at max 5.64% of value against aid
• Student-owned assets (UTMA/UGMA) counted at 20%
• Grandparent-owned 529: no longer counted after the FAFSA Simplification Act (2023+)

Having a 529 doesn’t meaningfully hurt aid. In fact, it’s one of the most aid-friendly ways to save.

9. Grandparent 529s: now a stealth win

Post-FAFSA-reform, grandparent-owned 529s:

• Don’t count as parent or student asset
• Don’t count as student income when distributed (previously a problem)
• Grow tax-free just like parent-owned 529s

If grandparents want to help, this is now strictly better than gifting to parents.

10. The “underfund on purpose” strategy

Fully funding a 529 runs two risks: your child doesn’t attend college, or they attend a cheaper school than expected. Either way, non-qualified withdrawals cost you income tax + 10% penalty. A reasonable strategy is to save ~60-70% of projected cost in the 529 and the rest in a taxable brokerage. If extra is needed you can tap the brokerage; if surplus remains, no penalty applies.

11. SECURE 2.0: the 529-to-Roth IRA rollover

Starting in 2024, unused 529 funds can be rolled to the beneficiary’s Roth IRA:

• 529 must have been open 15+ years
• Lifetime cap: $35,000 per beneficiary
• Subject to annual Roth IRA contribution limits
• Contributions made within the last 5 years aren’t eligible

This removes much of the “what if I overfund” risk — surplus can become the child’s head start on retirement savings.

12. Scholarships, grants, and work-study reduce the target

The average in-state student pays ~65% of published cost after aid. Private colleges discount tuition heavily via merit and need-based aid. Don’t plan for the sticker price — plan for the net price. Use each school’s net price calculator (required by law on their website) once your child is in high school.

13. Common mistakes

• Starting late. Compounding does most of the work; missing the first 5-10 years means 3-5x higher monthly contributions.
• Picking the wrong state plan. High-fee plans cost 0.5-1%+/year; over 18 years that’s 10-20% of final balance.
• Over-saving in a 529. Tax penalty on non-qualified withdrawals; mix in a taxable brokerage.
• Prioritizing college over retirement. Kids can borrow for college; you can’t borrow for retirement.
• Ignoring fund options. Age-based portfolios are fine defaults; check the underlying fund expense ratios.

14. Run the numbers

Use the calculator below to set a monthly savings target based on your child’s age, expected college type, and assumed return.

College savings calculatorCompound interest calculatorSavings goal calculator