How to Start Saving for Your Kids’ College

Raising children is expensive: According to the latest data from the Brookings Institution, the average child spends more than $300,000 from birth to age 17. And that doesn’t even take into account the huge cost of post-secondary education.

A new NerdWallet survey found that 1 in 5 parents of children under 18 (20%) have not yet started saving for their children’s college education but would like to. Here’s how to start.

When choosing a college savings account, look for tax-deferred options. One such option is a 529 account specifically designed to save for educational expenses. A 529 plan allows your savings to grow tax-free, and some states even offer a tax deduction on your contributions.

The downside of a 529 account is that you will be penalized if you withdraw the earnings for anything other than qualifying educational expenses. You can switch a 529 beneficiary to another family member. So if your child decides not to go to college, you can pay the qualifying educational expenses for another child or even yourself, but there is a risk that you won’t need the funds for education at all. There are also limited investment opportunities with a 529.

Another way to save is a Roth IRA, which is traditionally used as a retirement savings account, with tax-free growing income. Contributions to a Roth IRA are capped at $6,000 per year – $7,000 for those aged 50 and over – for the 2022 tax year. There are also income restrictions and contributions cannot exceed earned income. So if your child isn’t making any money, you’ll likely need to use your own Roth IRA to save for your child’s college.

Contributions to a Roth IRA can be withdrawn at any time, but income is normally subject to a penalty if withdrawn before age 59 1/2. If you made the first contribution to your Roth IRA at least five years previously, you can also see the accrual for qualifying education expenses. The benefit of using a Roth IRA over a 529 account is flexibility: If your child isn’t in school, you can leave the savings in the Roth IRA for your retirement. You also have more investment options.

The average tuition at a public four-year state university is $10,740 in 2021-22, according to the College Board. If your child is young, this will likely be much higher when they are ready for college. The costs are even higher when they live away from home and have to pay for room and board.

It can be overwhelming to think about how much your child will have to pay for college, but the best thing you can do with your money is time to grow. That means putting some money aside on a regular basis, even if it feels like a drop in the ocean, and getting started as soon as possible.

Let’s say you deposit $200 to start and then save $50 a month from birth to age 18. At the end of that time, you deposited $11,000, but when you factor in modest investment returns of 5%, you actually saved $18,025. That might not be enough to get you through four years of college, but it makes an impression. And that’s assuming your savings rate doesn’t go up.

Over time, you’ll likely find extra money in your budget that could increase college savings, like a tax refund or a pay rise. Childcare costs are also likely to decrease or disappear as your child gets older, reducing your fixed costs. Make a plan early on to use some of these funds to save more for college.

You might want to put a quarter of the windfall into college savings, or you might decide to reallocate money previously spent on child care to your 529. The details don’t matter, but you should make these plans before the money is in your hands. Otherwise, additional funds can allocate themselves.

The survey found that nearly 3 in 10 parents of children under 18 who have personal student loan debt (29%) prioritize saving for their children’s education over saving for retirement. While it makes sense for parents to want to keep student loan debt from weighing on their children, retirement planning must come first. Student loans are an option if your child needs them, but you can’t borrow to meet your retirement expenses.