Best Ways to Save for Your Kids' College (Plus Tips for Making the Right Choice)

Raising kids is a journey filled with milestones, dreams, and more than a few “how much does that cost?” moments—the biggest of which comes when you look at the price of college education. Saving for your child’s college education can trigger a mix of excitement, nervousness, and honestly even despair. But take heart—there are ways to prepare financially for your child’s future. 

In this article, we’ll share the best way to save for kids' college, practical tips for getting started, and some heartfelt advice from experts.

Why start to save for kids' college now?

When it comes to saving for college, universal advice from experts and parents who’ve been through it is: Start as early as possible. 

Tuition and fees won’t get cheaper as the years go by, so if you start saving now you’ll have more time to build a big balance—and if you invest wisely, say in a 529 plan, your money has more time to grow. 

“Opening a college savings account early provides friends, family, and even employers a convenient destination for contributions as a baby shower or new baby gift idea,” says Patricia Roberts, financial author of Route 529. “The power of compounding can be a gift that truly keeps on giving.”

How much to save for kids' college
Every parent wants to know, “how much should I save for my kids' college?” 

But the answer truly depends on your goals. For instance, if you aim to cover 50% of tuition at a state school five years from now, you’ll need a smaller target than if you’re saving for full tuition at a private university in 18 years. And that’s just speculation anyway: There's no crystal ball telling you exactly where your child will end up studying, and what the cost will be at that time.

“What if I can’t save enough to cover everything?”

Partial savings can still make a big difference. College costs can be supplemented with scholarships, financial aid, and other strategies, and it’s common for students to take on some financial responsibility for their education.

How to save for kids’ college: Understand your options

Let's explore some of the best ways to save for kids’ college, including options like 529 plans, Coverdell ESAs, and more. Whether you're just starting out or looking to optimize your existing savings strategy, there’s something here for everyone. 

1. 529 college savings plan

One of the most popular and flexible options for college savings, 529 plans offer a tax-advantaged way to invest for future education costs. Named after Section 529 of the Internal Revenue Code, these accounts are designed specifically for educational expenses and provide a variety of benefits for families.

How it works: 

You open a 529 account with your child as a beneficiary, and contribute money that grows tax-deferred. You can explore a variety of federal and state options. (To find out what’s offered, take a look at the College Savings Plan Network.) When it’s time to withdraw the funds, as long as they’re used for qualified education expenses (like K-12 or college level tuition, books, or room and board), the withdrawals are tax-free.

Pros:

• Tax benefits: Contributions grow tax-deferred, and withdrawals for qualified expenses are tax-free. Some states also offer tax credits or deductions for contributions.

• Flexibility: Funds can be used at accredited institutions around the U.S. and even some international schools.

• Control: Parents retain control over the account, unlike other minor accounts (like Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts), where kids gain control at the age of 18 or 21.

• Ability to invite others: Many 529 plans allow family and friends to contribute, making it easier to build up savings over time.

Cons:

• Market risk: As with any investment, 529 plans are subject to market fluctuations, so returns aren’t guaranteed.

• Penalties for non-educational use: Withdrawals for non-qualified expenses are subject to a penalty and taxes on the earnings portion.

Is it right for you? 

“Preparing in advance for higher education expenses is one of the best ways to avoid or minimize student loan debt,” Roberts says. “Looking back, opening a 529 college savings account early in my son’s life was one of the best decisions I made as a new parent.”

2. Coverdell education savings accounts (ESAs)

A Coverdell ESA is another tax-advantaged account that can be used for education expenses, though it comes with stricter contribution limits and eligibility requirements than a 529.

How it works: 

You contribute after-tax dollars to an ESA, and the money grows tax-free if used for qualified education expenses. Coverdell ESAs allow for a broad use of funds, including K-12 expenses.

Pros

• More flexible for younger kids: While 529 plans are great for college savings, Coverdell ESAs offer more flexibility for younger children. You can use the funds for a wider range of K-12 expenses, such as private school tuition, tutoring, and textbooks.

• Tax benefits: Growth and qualified withdrawals are tax-free.

Cons:

• Low contribution limit: Annual contribution limit of $2,000 per beneficiary, which may not be enough for college.

• Income restrictions: Higher earners may be ineligible to contribute.

• Lower return: While Coverdell ESAs offer more investment flexibility, it's important to note that they may not always outperform 529 plans, which often have lower fees and a wider range of investment options.

Is it right for you? 

If you have smaller, more specific savings goals for your child's education, such as private school tuition or tutoring, a Coverdell ESA can be a more efficient way to save.

3. Roth IRAs

While typically used for retirement savings, Roth IRAs can also be tapped for college expenses. A parent can withdraw their own contributions to a Roth IRA penalty-free to pay for their child's qualified education expenses. Since contributions to a Roth IRA are made with after-tax dollars, you can withdraw the amount you contributed without penalties at any time.

How it works: 

You contribute after-tax dollars to a Roth IRA, and the funds grow tax-free. You can withdraw contributions at any time without penalty, but earnings withdrawn before age 59½ may incur a penalty unless used for qualified educational expenses, such as tuition, fees, books, and room and board.

Pros:

• Dual purpose: Can be used for both retirement and education.

• Tax-free growth: Contributions grow tax-free and can be withdrawn for education without penalty.

Cons:

• Income limits: Higher earners may be ineligible to contribute.

• Contribution limits: The annual contribution limit may limit how much you can save for college.

Is it right for you? 

A Roth IRA may be especially appealing to single parents who want flexibility, as it allows them to save for their own future as well as their child’s education. That said, many financial experts advise people to prioritize saving for their own retirement before saving for their child’s education. There are no “student loans” for retirement. 

4. UTMA/UGMA custodial accounts

With these minor accounts, parents can transfer assets to a child’s name, which they can access once they reach legal adulthood. UTMA and UGMA accounts are often used for college savings, but the child can use the money for other purposes once they take control.

How it works: 

A parent or guardian opens a custodial account in the child’s name. Funds grow tax-deferred, and the child gains control of the account at a specified age, typically 18 or 21, which the parent can choose.

Pros:

• Flexible usage: Can be used for anything, not just college.

• Early transfer of wealth: Parents can gradually pass down assets.

Cons:

• Control passes to the child: Once the child reaches the age of majority, they have full control over the account.

• Financial aid impact: The account is considered an asset of the child, which can reduce eligibility for financial aid.

Is it right for you? 

If you’re comfortable with your child having control of the funds in adulthood, a custodial account could work as part of a diverse college savings strategy.

How to decide your best way to save for kids' college 

Choosing the best way to save for your child’s college depends on your financial goals, current savings, and long-term priorities. 

“Always prioritize retirement savings over college savings,” says accredited financial counselor Annie Hanson. “Think about how your adult children might feel years from now if they realize that you sent them to college but don’t have enough to retire.”

Here's what to keep in mind to make your decision:

• Assess your financial situation. Look at your income, debt, and overall savings to determine what you can reasonably contribute without sacrificing retirement.

• Factor in college cost projections. Research potential college costs to get a ballpark figure for your savings target.

• Start small, be consistent. “Save as much as you reasonably can and then stop stressing about it,” Hanson says. “Any amount is better than nothing, and even small amounts can grow into something significant over time.”

Bottom line

Figuring out how to save for college for your child doesn’t need to overwhelm you. Start where you are, make a plan that fits your family’s finances, and remember, there’s more than one way to cover college costs. As Roberts puts it, “Don’t panic; plan.” 

Whether you’re a single parent balancing multiple goals or married and just getting started, every dollar saved now is one less your child might need to borrow in the future.