As a parent, it’s normal to feel daunted—intimidated even—by the task of saving for your child's college education. According to the National Center for Education Statistics (NCES), the average cost of a public, four-year, college education currently hovers right around $23,000. To make matters more intimidating still, these costs are rising by an estimated 40% annually. With such statistics as these, how on earth will you afford to send your child through college? If you start small—and start today—you can do it, one simple step at a time.

Deciding how much to save

When establishing a college savings plan, financial experts are clear—the amount of money you need to save towards your child's college education is directly tied to the age your child is today.

If your child is heading to school in the next year or two, depending on the type of institution (public versus private), you can safely estimate $25,000 – $34,000. If your child is still small, however, you need to think bigger. According to CNN Money, if you have a toddler at home, $200,000 may very well be the amount needed to fund a public, four-year, college degree by the time your child reaches college age.

Note: Experts caution that there are many more resources available to help fund higher education than to provide for retirement as you age. In other words, do not skimp on your retirement savings plan in order to save for your child's education!

1. Just start saving

Beating yourself up for not being able to save "enough" is guaranteed to produce only one result: procrastination with saving anything at all. So just start saving. Small, monthly investments can grow faster than you realize—here’s an example to prove it.

  • $200 per month over 18 years at 8% annual return = $46,656

2. For long-term return on savings, bet on stocks

Financial experts agree that, for longer-term savings plans, stocks outperform any other investment vehicle. This is because tuition is outpacing inflation-based price increases. Only stocks can keep pace on that scale.

Note: As college gets closer, move at least the first year's funding into safer vehicles such as bonds or money market savings accounts.

3. Start researching other funding vehicles even as you start saving

There are many types of funding vehicles that can assist you in paying for your child's education. Start researching various options now. Here’s a list of options you can investigate.

  • School-based scholarships, grants, and loans: If your child has a short list of desired institutions, find out everything you can about their financial aid packages.
  • Private scholarships, grants, and loans: If you have a certain gender or ethnic background, or if you belong to certain professional organizations, or if your child is studying a particular major, or if your child excels in a particular area (and many more options besides) there may be private funding tailor-made for him or her.
  • Federal funding: Learn all you can about the FAFSA (Free Application for Federal Student Aid) form, which you and your student will need to fill out to apply for federal grants, loans, and work-study funding.
  • State funding: You can visit your state's official website to learn more about state-specific college education funding options.
  • Private bank loans: While a private bank loan should never be your first choice for higher education funding, it’s always a good idea to find out what types of loans and interest rates are available should the need arise.

4. Embrace tax breaks

Tax breaks may not place money into your college savings account on the front end, but it sure can alleviate the burden on the back end! The IRS provides two tax savings vehicles for parents who are paying for a child's college education and other assists as well.

Two IRS tax credits:

  • American Opportunity Tax Credit: A credit worth up to $2,500 on the first $4,000 of IRS-qualified education costs. There are some additional income requirements, but this tax credit is valid for four full years of college education.
  • Lifetime Learning Credit: A credit worth up to 20% or up to $10,000 in IRS-qualified education costs. This credit can be taken for both undergraduate and graduate work.

Note: You must choose either one or the other credit for a tax year per student, but you can choose the more beneficial credit for each additional student you are funding.

IRS student loan interest deduction:

  • In addition to selecting one or the other of the two tax credits for each student, you can also deduct interest you are paying for student loans (up to $2,500 in each year).

Note: There are some additional income-specific requirements for taking this deduction based on how much you make and how you are filing.

529 Plan:

  • The 529 Plan is an IRS-approved savings vehicle administered by either the state or the educational institution. Funds invested are exempt from state or federal income tax and you can choose to open either a savings or a prepaid tuition plan.

Note: Anyone can open a 529 plan as long as you abide by the IRS contribution guidelines.

5. Do everything you can to maximize your family's eligibility for all kinds of aid

Finally, offers a list of specific strategies you can adopt to maximize your ability to capitalize on all available sources of college funding.

  • Put the majority of college savings in your own name rather than your child's name.
  • Spend all available college-specific savings before beginning to spend your other aid vehicles.
  • Start working now to lower your overall family debt and boost your credit.
  • Max out retirement fund contributions (this keeps your annual income lower and increases your eligibility for need-based aid).
  • Find other ways to spend down ready cash, including prepaying college expenses.


5 Simple Steps to Start Saving for Your Child’s College Education