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How much money should you save for college?

    College can be a lot. It demands a lot of time, a devotion to academic advancement, and often a significant financial investment. When it comes to the money component, the question is: how much are we talking about? And how much should you have saved ahead of time, ideally?

    The answer to those questions can feel muddy. That’s because college costs can differ significantly for every student depending on how much financial aid they ultimately receive, where they attend college (in-state or out-of-state), if the college is public or private, if the student lives on or off campus, and a range of additional factors.

    That said, it’s still important to prepare financially as early as possible. In this article, we’ll look at how much college costs today, how to approach the question of how much to save for college, and ways to optimize saving for college.  

    How much does college even cost?

    U.S. News reports that for the 2022-23 school year, the average public in-state college tuition and fees came to $10,423, while average public out-of-state tuition and fees came to $22,953. Comparatively, the average private college tuition and fees totaled $39,723 for the 2022-23 school year.

    If you’re interested in the costs for specific colleges, you can look at in-state or out-of-state cost of attendance numbers for the colleges you’re considering specifically. Most colleges publish these numbers right on their websites. These numbers don’t factor in financial aid, though. Keep in mind that if you’re eligible for financial aid and scholarships, this can help you reduce these costs.

    When you’re preparing to pay for college in the future, you can’t just look at the current cost of attendance data; you also have to prepare for what costs could look like in the future. U.S. News reports that private ranked colleges’ average tuition and fees have climbed by about 4% from 2022-23 to 2023-24. Public school tuition and fees rose 2% for in-state students and 1.4% for out-of-state students during that same period. While knowing how much costs will increase in the future is impossible, this is undoubtedly something to think about.

    How much should you save for college?

    While it’s difficult to know how much college will cost in the future and how much financial aid you’ll be eligible for in the future, one starting point to at least begin thinking about how much to save for college is to determine what your Expected Family Contribution (EFC) would be today. Your EFC is what colleges use to decide how much financial aid you’re eligible to receive, if any, and is based on information you and your family provide on the Free Application for Federal Student Aid (FAFSA®).

    Your EFC shapes what college will cost you considering a school’s cost of attendance and then factoring in what you, and if you’re a dependent, your family could contribute to pay for school. You won’t necessarily have to pay the EFC that gets supplied to you following the FAFSA® process, though. Scholarships, differing aid packages from schools, and other reasons can change how much financial aid you’ll receive and how much you’ll be responsible for paying for school.

    Still, your EFC is at least a starting point to begin to answer the question of how much to save. You can use the online calculator provided by Federal Student Aid to calculate your potential EFC. It bears repeating that this calculator will be crunching the numbers on your EFC as it stands today, and if you’re preparing to pay for college in the future, it could change.

    One more factor to keep in mind is that beginning with the 2024-25 school year FAFSA®, opening in December 2023, the Student Aid Index (SAI) will replace EFC. This could change how you assess how much to save for college, but for now, familiarize yourself with EFC and how it works.

    How to save for college

    As you save for college, consider options that might maximize your ability to save. Here are some potential options to consider. Each family and student’s financial situation is unique. It’s essential to research which saving options will work best for you to make an informed financial decision.

    College savings account options

    529 savings plan

    A 529 savings plan is a tax-advantaged investment product that potentially helps people save for education costs. Here’s what to know about these plans and their potential benefits.

    • Assets are contributed to a 529 plan. The contributor usually manages investments and distributions as the account owner.
    • Investments in a 529 plan grow income tax-free. Withdrawals utilized for qualified education costs won’t be subject to federal income tax.
    • Some states give contributors a state income tax deduction for 529 contributions.
    • 529 plans exclusively cover qualified college and post-graduate education expenses (any sum) and K-12 tuition expenses (up to $10,000 annually per child).
    • Withdrawals made for purposes other than education will have the income portion taxed at regular rates and an additional 10% penalty. 529 plans can vary in different states. Consider speaking to a tax professional if you have additional questions.

    Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)

    The UGMA/UTMA are custodial accounts that can be applied to pay for various financial needs, not just college funding.

    These accounts are generally created by a parent or grandparent to benefit a minor child or grandchild. When you contribute towards a custodial account, you make a gift to the minor beneficiary of the account, even though the minor doesn’t control the account. The account creator usually acts as the account’s custodian. This could also affect the student's eligibility for financial aid.

    Here’s what to know about UGMA/UTMA plans and their potential benefits.

    • Withdrawals aren’t subject to federal tax (when used for qualified education expenses).
    • Assets are permanently transferred to a minor. However, an adult custodian maintains control until the minor reaches the age of 18 or 21 (or, in some jurisdictions, 25).
    • There may be legal limitations on investments within these accounts.
    • If a contributor to a UTMA or UGMA account also serves as its custodian, the entire account or a part of it will typically be included in the custodian’s taxable estate.

    Coverdell Education Savings Accounts (ESAs)

    A Coverdell Education Savings Account (Coverdell ESA) is a trust or custodial account to cover qualified education costs for the designated account beneficiary. This tax-advantaged investment account extends to qualified higher education expenses and to qualified primary and secondary education costs. There are specific criteria for establishing a Coverdell ESA, including:

    • The designated beneficiary must be under 18 years old or a special needs beneficiary when the account is set up.
    • The account must be identified as a Coverdell ESA when it’s created.
    • The document that establishes and governs the account must be written and fulfill certain requirements.

    Final thoughts

    While it’s hard to precisely predict how much you’ll need to save for college, preparing in advance will likely help.