Thinking about your child’s future can be exciting, but it can also be a source of financial stress. If you have a newborn, your child’s future education at a four-year, public, in-state university could cost over $175,000.
That steep cost can be intimidating, but starting a college fund early is a great first step. The sooner your start, the better. But, every dollar you save will reduce the need for education debt, so it’s never too late to start.
If you’re not sure what account options to use or when to start saving, the following information will help:
When to Start Saving for College
With the high cost of college, starting as early as possible can pay off over the long run. It may seem silly to set aside money for a baby’s college expenses, but saving money now will help your money grow. The earlier your start, the less money you have to contribute out of your own pocket.
For instance, say your child is a newborn, and you start saving now. You contribute $$50 per month in an investment account, and it earns an annual average return of 10%. By the time your child reaches the age of 18, you’ll have contributed $10,800. But, the account will be worth over $30,000; interest and market growth increased the balance by nearly $20,000.
By contrast, say you waited until your child turned 12 to start saving. To build a college fund of at least $30,000 by the time your child turned 18, you’d have to save over $200 per month.
However, it’s important to balance saving for a child’s education with your own financial needs. Make sure you contribute to your own retirement fund and pay down debt before tucking away money for college; while there are loans your child can take out for college, loans aren’t an option for retirement expenses, so planning for your own future is key.
Best Ways to Start a College Fund for Parents & Guardians
Which account type is best for you depends on your child’s goals, your financial situation, and how flexible you want the account to be. These are the most popular options:
529 College Savings Plan
There are two types of 529 plans:
- Prepaid plans allow a person to buy college credits for a beneficiary, so when the child enters college, those credit hours are already paid for.
- Savings plans are tax-advantaged investment accounts where the money is invested in mutual funds until the child is old enough to attend college.
Prepaid plans are less common now, so savings plans are much more popular.
With a 529 savings plan, withdrawals are tax-free as long as the money is used for qualifying education expenses. Non-qualifying withdrawals are subject to income taxes and a 10% penalty. Eligible expenses include:
- College tuition
- School-required fees
- Book, supplies, and required equipment for class
- Room and board if the student is living on campus
Changes to qualifying 529 expenses
President Trump’s One Big Beautiful Bill made major changes to financial aid, including 529 plans. These are some of the major highlights:
- K-12 expenses: Parents can now use up to $20,000 per year to pay for K-12 expenses, such as private school tuition. The OBBB expanded the list of eligible expenses to include online education materials, tutoring expenses, fees for standardized tests, and educational therapy for children with disabilities.
- Programs: Some work training or certificate programs now count as eligible programs for 529 withdrawals.
- ABLE: The OBBB made permanent a provision that allowed families with children with disabilities to roll 529 funds into Achieving a Better Life Experience (ABLE) account.
Tax Benefits
Some states offer tax perks to those who contribute to a 529 fund. And, some states offer other incentives, such as a starting contribution. For example, West Virginia gives families $100 in 529 contributions if they open and contribute to an account before the child’s first birthday.
Visit CollegeSavings.org to view information about 529 plans in every state.
Coverdell Education Savings Account (ESA) or Education IRA
A Coverdell Education Savings Account, also known as an Education IRA, is an account that allows you to invest in options including stocks, bonds and mutual funds to cover educational expenses.
With this type of account, you can contribute post-tax money up to $2,000 per year per child if income guidelines are met. Funds can be withdrawn tax-free for qualifying expenses, and The money can be used for tuition, mandatory fees and required books and supplies in college or private school for kindergarten through 12th grade.
To make the full $2,000 contribution in 2025, joint filers cannot earn more than $190,000. Once the joint income reaches $220,000, contributions cannot be made. The beneficiary must use the money by the time they turn 30 years old.
Uniform Transfer (UTMA) or Gift to Minors Act (UGMA)
If you want your child to have more flexibility with the savings you build, a UTMA/UGMA account may be a good alternative.
These accounts allow an adult to be in charge of the assets until the child reaches the age of majority (varies by state, but usually between 18 and 21).
Money in the account can be used at any time for the benefit of the child. And, once the beneficiary reaches the age of majority for the account, they can use the money however they wish. For example, they can use the money to buy a car or put a down payment on a house.
Roth Individual Retirement Account (IRA)
When you begin to think about starting a college fund, a retirement account may not be the first option that comes to mind. But in some cases, a Roth IRA can be a useful tool.
Money contributed to a Roth IRA is made with post-tax dollars, so there’s no upfront tax benefit. But, money invested in a Roth IRA can be withdrawn without penalty for education expenses, and you can withdraw the money you contributed at any time for any purpose without taxes or penalties.
The owner of the account can use the funds for their own education, their spouse’s education, or for their children or grandchild’s college expenses.
Learn More: Using a Roth IRA to Pay for College
College Savings Tips for Future Students
No matter what methods a parent uses to save for college, it is beneficial to teach your student about the power of smart money management. Students can save for college in a variety of ways, including:
- Focusing on grades and extracurriculars to build a well-rounded college application that can help them qualify for scholarships
- Setting realistic expectations of costs and creating a budget so both the parent and child will be on the same page of what costs each will be responsible for
- Getting a job in the summer and saving for future school expenses.
- Taking AP or dual enrollment classes while in high school to earn college credits at a much lower cost.
- Setting savings goals for themselves, and practicing working toward those goals.
Make Up the Difference with Student Loans
With the rising costs of college, it can be challenging to cover every expense. If your student needs an extra financial boost, student loans may be an option to cover extraneous expenses. ELFI offers private student loans to help students pay for school, with affordable rates and flexible terms. You also won’t have to pay an application fee or an origination fee, so you can focus your efforts on important college costs.
