The Best Ways to Start Saving for College

Jocelyn Segoviano
Jocelyn Segoviano

Jocelyn Segoviano is a freelance writer specializing in personal finance topics. With a passion for helping individuals navigate their financial journeys, she has been providing insightful advice and practical tips to readers for over years.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 13, 2023

According to a report done by the Education Data Initiative, one year of college is currently $35,331, on average. Saving for college, then, is more important than ever. As parents, you want to make sure your child gets a college education with little student loan debt. The best way to do that is to start saving money for their college. How? Let’s get into it. 

How Much Does 4 Years of College Really Cost? 

Four years of college can cost well over $100,000, and it’s only expected to go up. To give you a better idea of how expensive it can get, right now the cost of tuition at a public, 4-year, in-state school is $22,690 per year. By 2035, it’s projected that it will rise to $32,572 per year. 

How much you’ll pay for college will also be dependent on several other factors. For example, like whether your child decides to go to a public or private school. Private colleges usually cost more. Another factor is how much financial aid they can get like scholarships, grants, and loans

When Should I Start Saving for College? 

Our advice? Right now. College prices are only going to get higher, so it’s better to start saving for college sooner rather than later. It doesn’t matter if your child is a newborn, in elementary school, or already in high school. Starting now and having some money saved is better than having nothing. Lucky for you, there are plenty of ways to start your college savings plan.

5 Ways to Save for College 

There are many different ways to start saving for college. Here is a list of 5 ways we think could be great options for you.

Open a 529 Plan

A 529 Plan is an education savings account, meaning it’s a type of savings account for college. It offers both federal and state tax benefits when you use the money for education-related expenses. 


  1. Earnings and withdrawals are tax-free when used for education-related expenses.
  2. Depending on your plan, investments can grow to $500,000 over the life of the account and deposits up to $16,000 per person can qualify for gift tax exclusion. 
  3. You can treat a contribution of up to $80,000 made in one year as made over five years to shelter a larger amount from taxes.
  4. 529 Plans are treated as parent assets and don’t have to be reported on the FAFSA when taking out money for school.


  1. There are penalties and withdrawals if the money is used for non-educational costs. 
  2. These programs offer limited investment options. 
  3. Withdrawals from the account by someone other than you or your child will be added to their income on the FAFSA. This can reduce their financial aid eligibility. 

Consider Mutual Funds 

Mutual funds are diversified investment portfolios. This means that instead of investing in only one stock or bond, you’ll invest in multiple. These investment plans are managed by financial advisors or banks. 


  1. The money can be used on anything, so you don’t have to limit yourself to using it just for college expenses (say, for example, your child decides not to go to college).
  2. You don’t have any limits to how much you can invest. 


  1. The earnings are subject to annual income tax.
  2. Any earnings transferred to your child are viewed as income on the FAFSA. This can impact their financial aid eligibility.
  3. Capital gains are taxed when the shares are sold. 

Open a Custodial Account

A custodial account is a brokerage account that you’ll open on behalf of your child and then transfer to them once they’re either 18, 21, or 25 years old. The account will invest in several securities including stocks, bonds, and mutual funds. 


  1. The money can be used on anything, so you don’t have to limit yourself to just college expenses. 
  2. You don’t have any limits to how much you can invest. 
  3. The value of the account can be removed from your gross estate. 


  1. Once your child receives the money, they may be subject to the kiddie tax. The kiddie tax is a tax on any unearned income they receive at or before they’re 23 that’s over $2,300. 
  2. These accounts are viewed as student assets on the FAFSA. This can reduce your child’s financial aid eligibility. 

Consider Savings Bonds

Savings Bonds are securities backed by the U.S. Government. It’s one of the safest ways to invest, and you’re guaranteed to get money back since it’s a low-risk investment. 


  1. These are federally tax-deferred and state-tax free.
  2. Certain bonds, like the Series EE and I bonds, purchased after 1989 can be redeemed federally tax-free if used on higher education expenses.


  1. The maximum amount you can invest is $10,000 on your own and $20,000 as a married couple per year, per owner, per bond.
  2. If earnings are not spent on higher education expenses, then any interest earned will be counted as income and taxed.
  3. Compared to other options, you’ll receive lower returns. 

Open a Roth IRA

A Roth IRA is an individual retirement account that you can contribute to and earn interest on tax-free. You can even withdraw the money tax-free once you are 59 years old. 


  1. You can withdraw for any reason. 
  2. If the money withdrawn is used for higher education expenses, the penalty is waived. 
  3. There is a range of investment options. 
  4. These are not counted as assets on the FAFSA.


  1. The maximum annual contribution allowed is $6,000 or, if you are over 50, $7,000. 
  2. Individuals earning more than $144,000 per year or married couples earning more than $214,000 per year are ineligible to contribute. 
  3. Withdrawals for your college student are counted as untaxed income. This can reduce their financial aid eligibility.
  4. Withdrawing money from a Roth IRA account can delay your retirement. 

How Much Should I Save for College? 

Depending on when your child is heading to school, it can be hard to figure out how much money you should be saving for college. There are projections of how much prices will go up, so those can help give you an idea of the cost. Additionally, there are also college savings calculators. They can give you projection costs, let you know how much you’ll cover, and how much more you might need to save. 

Final Thoughts from the Nest 

Saving for college can seem like a mountain that’s hard to climb. It’s a very big goal and is extremely intimidating. But the important thing is making sure your child has something to help them through college. No matter how much that is. Start saving now and consistently, and you’ll be just fine. 

You can even use Sparrow to help pay for your child’s education. If you have exhausted all other financial aid resources, Sparrow is a great way to look for private student loans. Fill out the application to see what you can qualify for at 15+ lenders.

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