How To Save For College
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1. Project the future cost
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.
2. 529 plans are the default account
Start with today’s cost (College Board published average), then inflate at historical college inflation of ~5% per year:
3. What counts as a qualified 529 expense
A 529 is a state-sponsored education savings plan with:
4. Coverdell ESAs
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.
5. UTMA/UGMA accounts
Not qualified: transportation, health insurance, extracurricular fees. Non-qualified withdrawals trigger income tax plus a 10% penalty on the earnings portion.
6. Age-based 529 portfolios
A less-common alternative:
7. How much to save per month
The $2k cap makes ESAs supplemental. Most families use a 529 as the primary vehicle.
8. Financial aid impact (FAFSA)
Custodial accounts in the child’s name:
9. Grandparent 529s: now a stealth win
UTMA/UGMA made sense before 529s existed. Today they’re usually only preferred when you want flexibility on non-education uses.
10. The “underfund on purpose” strategy
Most 529 plans offer an age-based option that auto-rebalances from stock-heavy to bond-heavy as the child approaches college:
11. SECURE 2.0: the 529-to-Roth IRA rollover
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.
12. Scholarships, grants, and work-study reduce the target
Rough calculation to cover a public in-state college for a newborn (18-year horizon, 7% net return, 5% inflation):
13. Common mistakes
Under FAFSA rules:
14. Run the numbers
Having a 529 doesn’t meaningfully hurt aid. In fact, it’s one of the most aid-friendly ways to save.