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7 Ways to Save for College Tuition

This same question has occurred over and over for years for a countless number of families: As college costs continue to rise, how do you pay for it?

At public four-year institutions, the average tuition and fees were $9,400 in 2019–20 (about 13% higher compared to 2010–2011). The National Center for Education Statistics reported that at private nonprofit four-year institutions, the average tuition and fees were $36,700 in 2019–2020, about 18% higher than they were in 2010–2011. At private for-profit four-year institutions, the average tuition and fees were $19,100 in 2019–2020, around 8% higher compared to the years 2010–2011.

How much has the cost of college risen? The average cost of going to college has increased by as much as 2,700%. This means it has risen about 4.6 times the rate of inflation during the last 50 years.

Is it a lost cause to save for your child’s college education? Not at all, and in fact, it’s important to get started early so you can save enough, no matter what type of college your student wants to attend.

What is the Best Way to Save for College?

There’s no “one” way that will help you save for college “better” than any other way. You can put money into your child’s college fund using multiple routes. However, you’ll want to consider a wide variety of options before you get started. You may want to consider factors such as contribution limits, financial aid opportunities your child might be eligible for, tax benefits and other factors before you choose one investment option over another.

Try not to get overwhelmed by the number of options you can use to save money. You can pick just one or two options and stick to that college savings plan to carry you through until your child heads off to college. That way, you keep your eye on the prize and commit to one strategy to pay for college expenses. (Keep in mind that this doesn’t give you license to ignore what’s in your account. You still want to monitor your child’s account to make sure you have the right asset allocation and that it’s appropriate from kindergarten to high school.)

That said, let’s take a look at several ways you can save for college, including opening a 529 plan, putting money into savings bonds, opening a Coverdell ESA, Roth IRA, custodial accounts or stocks. These are just a few options you can use — your creativity may lead you to save in a wide variety of other ways as well.

1. Open a 529 plan.

A 529 plan is a tax-advantaged investment vehicle that encourages you to save for future higher education expenses for your child, who is also called a beneficiary. You can often tap into state tax benefits when you save money in a 529 plan. For example, the state of Iowa allows state residents to deduct annual contributions from their state income taxes — a total of $3,522 per beneficiary for single taxpayers and $7,044 per beneficiary for taxpayers filing married/jointly.

The major benefit to saving in a 529 plan is that although contributions are not deductible, your earnings grow tax-free and you also will not pay taxes on the money when it is taken out to pay for college.

However, it’s important to note that when withdrawals exceed adjusted qualified education expenses, all or part of the earnings you withdraw will be taxable. This means you must spend the money on things like tuition, books, supplies, room and board, computer equipment and internet access. If you decide to pay for landscaping or do something else with the money from your child’s 529 account, you’ll pay taxes on the amount you have invested.

You don’t have to invest in your own state’s 529 college savings plan, but remember that you may forgo your state’s tax incentives when you do so. In addition to tax benefits, you’ll also note other benefits of 529 plans, including the fact that it’s easy to transfer money from one beneficiary to another. (For example, if one child chooses not to go to college, you can name another family member as a beneficiary instead.)

It’s easy to set up a 529 plan for your child. Simply check out the website that outlines your state’s plan. For example, if you live in Delaware, you may want to check out Delaware’s DE529 Education Savings Plan through Fidelity.

529 plans do not have annual contribution limits but in terms of the gift tax exclusion, you’re limited in 2022 up to $16,000 as a donor.

2. Put money into savings bonds.

You can use two types of savings bonds for college planning: Series EE and Series I bonds. The education tax exclusion permits you to exclude all or part of the interest paid on the bonds when you redeem them by paying for qualified higher education expenses at an eligible institution. Learn more about the details of savings bonds for higher education on the Treasury website.

To apply for the exclusion, you’ll attach IRS Form 8815 to IRS Form 1040 or IRS Form 1040-SR.

3. Open a Coverdell education savings account.

The government-created Coverdell education savings account is a tax-deferred trust account that helps fund educational expenses for your child. Your child must be 18 years old or younger when you establish the account. You can only contribute a total maximum after-tax contribution of $2,000 per year for any one beneficiary but you may be unable to contribute less than that if you have a modified adjusted gross income (MAGI) between $190,000 and $220,000. Incomes over $220,000 are ineligible to contribute to a Coverdell.

You don’t have to pay taxes on investment income or capital gains. Plus, withdrawals are free from federal taxes as long as you spend the money on qualified education expenses.

4. Open a Roth IRA.

Wait — aren’t Roth IRAs retirement accounts? Yes, but you can use them for educational expenses as well. Roth IRAs provide a great way to get tax breaks and combat your child having to take out student loans and dealing with student loan debt.

You’ll tap into tax advantages if you save money in a Roth IRA because you save with after-tax money and therefore earnings accumulate on a tax-deferred basis. Distributions are completely tax free but it’s important to note that they can hurt your child’s eligibility for need-based financial aid.

You can only make $6,000 contributions per year (or $7,000 if you’re 50 or older). Furthermore, note that it could be risky to use your retirement money for your child’s college education. You can always help your child fill out the Free Application for Federal Student Aid (FAFSA) to receive financial aid and student loans, but you can’t take out a loan for retirement. It’s usually best to allow your students to take out federal student loans instead of pulling from money you’ll need for the future.

5. Put money into a custodial account (UGMA/UTMA).

A custodial account, also called a Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA), depending on your state, is a brokerage account in the child’s name. You can invest in a wide variety of investment types, including stocks, bonds and mutual funds.

When will your child receive the money? Your child can tap into it at the age of majority, usually between 18 to 25, depending on the rules in your state. However, if your child chooses not to enroll in a community college or a state college, they can decide to spend the money on something you really didn’t want them to use the money for, like a brand new Corvette. UGMAs and UTMAs also heavily affect financial aid eligibility because they are counted as student assets. However, the flexibility they offer over other options makes them a great option.

Pro tip: UNest offers UTMAs as well as a slew of other opportunities, including the opportunity to purchase cryptocurrency to help you invest and save for your child’s future. Opening a UNest Investment Account for Kids requires no paperwork and takes just five minutes.

6. Invest in stocks or mutual funds.

In some ways, the sky’s the limit when you choose to invest in stocks, mutual funds, ETFs or other investments to save for your child’s college education. You’re not limited by any income restrictions or other types of restrictions when you choose to save for college in this way. However, you also can’t tap into the same tax advantages that you can with, say, a 529 Plan or Roth IRA.

Investing in stocks, ETFs and mutual funds gives you wide latitude to invest how you want, however, you’ll have to manage the right level of risk in order to successfully invest. Not diversifying and investing in one stock could cause you to lose your child’s entire college investment.

7. Choose a prepaid tuition plan.

When you opt for a prepaid tuition plan, you lock in today’s costs of private colleges and public universities for the future. In other words, if you pay tuition today for University X, you will not have to pay the inflation rate on tuition costs in the future. You can purchase units or credits, either in a lump-sum payment or in regular installments.

However, only nine states offer this option: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington. Your child must attend college at an in-state college or university in one of those states and it only goes toward tuition. You also run the risk that your state could close its plan, though it’ll usually honor the current plans of account holders.

When to Start Saving for College

If you can do so, you should start saving for college as soon as your child is born to give compound interest a chance to kick in. You’ll grow your investment over time with more years in your investment account. You may be able to get away with saving less in your child’s high school years with a more robust investment in the first years of your child’s life.

How Much to Save

For a child born this year, according to, parents should save at least the following amounts from birth to college enrollment:

  • $250 per month for an in-state public four-year college
  • $450 per month for an out-of-state public four-year college
  • $550 per month for a four-year private college

That number may seem daunting, so if you don’t think you can meet these goals, don’t give up! Save as much as you can. Your child may become eligible for scholarships and other awards that will fill in the gaps to save for college.

How to Invest: Make Savings Automatic

One of the best ways to invest is to open one of the above account types and make savings automatic every month. You likely won’t miss the money because you don’t have to make a conscious effort to ask yourself whether you want to invest during a particular month or not — it’ll just happen.

Choose an amount based on the amounts listed above or an amount that you think will work for your budget and set up an automatic deduction from your bank account on a monthly basis. It’s easy to set up, and you could see interest rate returns on your investment quicker than you may think!

Bottom Line

As long as you’re saving, you can’t go wrong, right? Well, it’s definitely important to choose the right option for you. For example, if you want to contribute more than $2,000 per year toward your child’s account, a Coverdell ESA might not be the right savings vehicle for you. 

Investigate your options thoroughly before you decide which investment options meet your goals and time horizon. Ultimately, you have a much shorter time horizon in which to save (just 18 years, if you start when your child is born!) so you have to make every month count.

Let UNest guide you. Download the app today and start saving. Costs start at just $2.99 per month and you can contribute as little as $25 per month.


This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.