How to Save for College
Compare savings accounts, set a savings goal, and build a plan that works
The 1/3 Rule for College Savings
A widely used framework: plan to cover college costs in thirds — one-third from savings, one-third from current income during college, and one-third from loans. This prevents over-saving (at the expense of retirement) while limiting debt.
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Save now
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Pay as you go
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Student loans
Compare College Savings Accounts
529 Plan
Best for most familiesAnnual Limit
No annual limit (gift tax rules apply above $18K/yr)
Tax Benefit
Growth tax-free; withdrawals tax-free for qualified expenses
FAFSA Impact
Up to 5.64% of balance counted (parent-owned)
Flexibility
Moderate — can change beneficiary or roll to Roth IRA
Pros
- ✓ State tax deductions in most states
- ✓ High contribution limits
- ✓ Low impact on FAFSA
- ✓ Can now roll unused funds to Roth IRA (up to $35K lifetime, after 15 years)
Cons
- ✗ 10% penalty on earnings if used for non-education purposes
- ✗ Limited investment options vs. brokerage
Coverdell ESA
Good for K–12 + collegeAnnual Limit
$2,000/year per beneficiary
Tax Benefit
Growth tax-free; withdrawals tax-free for education
FAFSA Impact
Parent asset (same as 529)
Flexibility
Good — can use for K–12 or college
Pros
- ✓ Covers K–12 private school tuition (529 covers this too now)
- ✓ Wider investment options than 529
- ✓ Tax-free growth
Cons
- ✗ Low $2,000/yr contribution limit
- ✗ Income limits: phases out at $95K–$110K (single) / $190K–$220K (married)
- ✗ Must be used by age 30
UGMA/UTMA Account
Most flexible — but costs more aidAnnual Limit
Unlimited
Tax Benefit
No special tax benefits; 'Kiddie Tax' may apply
FAFSA Impact
Student asset — 20% counted (much higher impact than 529)
Flexibility
Highest — no restrictions on use
Pros
- ✓ No restrictions on use of funds
- ✓ No contribution limits
- ✓ No penalty for non-education use
Cons
- ✗ 20% of balance counted as student asset on FAFSA
- ✗ No tax-free growth
- ✗ Once gifted, irrevocable — child owns it at majority
Roth IRA
Good backup / dual-purpose savingsAnnual Limit
$7,000/yr (2024); must have earned income
Tax Benefit
Growth tax-free; contributions withdrawable anytime
FAFSA Impact
Not counted as asset — but withdrawals count as income
Flexibility
Highest — can keep for retirement if not needed
Pros
- ✓ Preserves retirement savings
- ✓ Contributions (not earnings) withdrawable penalty-free
- ✓ Not counted as asset on FAFSA
Cons
- ✗ Withdrawals count as income on FAFSA (may raise SAI)
- ✗ Annual contribution limits
- ✗ Income limits for direct contributions
Savings Milestones by Child's Age
These monthly savings targets assume a 6% annual return and target covering one-third of a projected 4-year public in-state cost.
| Child's Age | Monthly Target |
|---|---|
| Birth – 5 | $150–$300 |
| 6 – 10 | $200–$400 |
| 11 – 14 | $400–$700 |
| 15 – 17 | $700–$1,200 |
| 18+ | — |
Frequently Asked Questions
What is a 529 plan?
A 529 plan is a tax-advantaged savings account designed specifically for education expenses. Contributions grow tax-free, and withdrawals for qualified education expenses (tuition, room & board, books) are also tax-free. Most states offer a tax deduction or credit for contributions to their own state's plan.
How much should I save for college per month?
A general rule of thumb: save one-third of projected costs, borrow one-third, and pay one-third from income at the time. For a child born today targeting a 4-year in-state public school, saving $200–$300/month from birth (assuming 6% growth) should cover about one-third of projected costs.
Does a 529 affect financial aid?
Yes, but minimally. A 529 owned by a parent is counted as a parent asset on FAFSA, reducing aid by at most 5.64% of the balance per year. Grandparent-owned 529 plans no longer affect financial aid under the simplified FAFSA (starting 2024–25).
Can I use a Roth IRA for college savings?
Yes — Roth IRA contributions (not earnings) can be withdrawn penalty-free for any reason, including education expenses. However, Roth IRA withdrawals count as income on FAFSA, which can increase your SAI. Use this strategy carefully.