Saving For Your Children's Education

How to save for your child’s college education

One of the most significant gifts you can give your children as a parent is the opportunity for a quality education. As tuition and related expenses continue to rise, starting planning early is crucial to ensure you can effectively save for your child’s education without compromising your financial stability.
Saving for your child’s education isn’t just about paying tuition—it’s about giving them freedom. Graduates burdened with student debt often delay milestones like buying a home or starting a family. By building an education fund, you empower your child to focus on learning and opportunity, not loan payments.

Why save for your child’s education?

Saving for your child’s education isn’t just about paying tuition—it’s about giving them freedom. Graduates burdened with student debt often delay milestones like buying a home or starting a family. By building an education fund, you empower your child to focus on learning and opportunity, not loan payments.

How much money should I save for my child’s college tuition?

The amount you should save will depend on various factors, including whether you plan to cover the total cost or just a portion of college and whether your child will attend a public or private institution. College costs have tripled over the last three decades and continue to rise. To help your child start their adult life without massive debt, it’s best to start saving for college as early as possible.

A simple way to estimate how much you should save is the “college savings 2K rule of thumb.” Multiply your child’s current age by $2,000—this is the amount you should have saved by that age. However, this is just a general guideline, and it’s never too late to start saving for your child’s education.

At District Capital, we help our clients plan early on how to save for their child’s college education. In this hypothetical example below, Sarah’s parents have saved $10,000 for their 5-year-old daughter. According to our projections, if they save $4,500 a year towards a 529 college savings plan and generate an average return of 6.1% a year, they can finance 2 years’ worth of college expenses for Sarah. This assumes a total expense of $30,000 in today’s dollars, including tuition, room and board, and a 4.7% rise in college costs a year. The rest can potentially come from scholarships and student loan borrowing.

What’s New in 2025?

Grandparent 529s no longer hurt FAFSA aid. Starting with the 2024–25 FAFSA (and continuing into 2025–26), distributions from grandparent-owned 529s are no longer counted as student income.
One Big Beautiful Bill Act of 2025 (OBBB): Beginning Jan 1, 2026, the federal K–12 529 limit doubles from $10,000 to $20,000 per student per year, and eligible expenses expand to include tutoring, books, testing, and certain educational therapies (state tax treatment may differ).
529 to Roth IRA rollover: Unused 529 funds can still roll over to a Roth IRA (lifetime cap $35,000, subject to Roth contribution limits, earned income, and 15-year account rules).
College cost growth: Recent annual tuition increases have been modest—public universities averaged <3% in 2024–25, private nonprofits ~3.9%—though long-term costs remain high.

An advisor’s perspective

Amy Spalding, CFP®

“Ideally, parents would begin saving for college as early as possible. Our favorite savings vehicle is a 529, preferably in the state of residence if there is a tax benefit in the form of a deduction that can be taken on state taxes.

We are often asked how much parents should save, and that depends on several factors, including the child’s age and type of college- public, private or out-of-state. If that is not clear, it’s better to start saving than to wait- small but consistent contributions really add up over time. One pitfall we see is letting funds sit in cash, so make sure to invest the funds after they are contributed. The younger the child, the higher the equity allocation can be. Age-based target date funds are often a good choice for 529s as they will adjust the asset allocation the closer the child gets to college.

Parents often worry about overfunding a 529, but funds can be rolled to other siblings and used for more than just traditional college. Recent legislative changes have also helped reduce the risk of overfunding. Assuming the 529 has been open for 15 years, up to $35k of remaining funds not used for education can be rolled into a Roth IRA for the beneficiary (Roth limits/ rules apply).

One last thing – friends or family members can also contribute to your child’s 529. Some states make it very easy for others to contribute. An added bonus is if the person lives in the same state, they can also get a tax deduction for their contributions.”

When should you start saving for college?

As with any investment, the earlier you start saving, the more time you have for it to grow. Many parents begin investing when their child is born, while others start a few years later. Ultimately, it is your decision, but the earlier you start, the more time the money can compound and the less stress you may have.

At birth: Saving $200/month at 6% growth ≈ $77,000 by age 18.
At age 10: You’d need ~$500/month to reach the same goal.

Steps to Begin Saving for Your Children’s Education

Set clear goals
- Determine how much you need to save based on the type of education (public vs. private, in-state vs. out-of-state) and whether you plan to cover the total cost or just a portion.
- Use college cost calculators to estimate future education costs, considering inflation.
Assess your financial situation
- Review your current financial situation, including income, expenses, debts, and other savings goals. It’s essential to balance saving for your child’s education with different financial priorities like retirement.
- Create a budget to identify how much you can save each month or year.
Explore savings options
- Several savings options are available for education, each with benefits and drawbacks.

The best ways to save for college

Paying for college can be one of the biggest financial concerns for many parents. When it comes to saving for your child’s education, there are several options to consider, each with its own set of benefits and potential drawbacks.

529 College Savings Plan (Best for most families):

- Tax benefits: Contributions grow tax-deferred; withdrawals for qualified expenses are tax-free. Many states offer tax deductions or credits.
- Eligible uses today (2025): Tuition, housing, meals, fees, books, computers, apprenticeships, up to $10k student loan repayment, and up to $10,000/year for K–12 tuition.
- New in 2026: Limit doubles to $20,000/year per student for K–12 and expenses broaden to tutoring, books, test fees, therapies. (State conformity varies.)
- If overfunded: Change beneficiaries, or roll over up to $35,000 lifetime to a Roth IRA (subject to 15-year rule, annual Roth limits, earned income).
- Contribution “limits”: No annual IRS cap, but states set aggregate limits (often $300k–$550k+).

Traditional Savings Account:

Overview: A traditional savings account is a straightforward option for saving money for your child’s future education. While not specifically designed for education, it offers flexibility in how the funds can be used.
Benefits: Flexibility in usage and easy access to funds. There are no restrictions on how the money is spent, and the funds can be used for any purpose, not just education.
Considerations: The interest earned is typically low, and no tax advantages are specific to education savings.

Roth IRA:

Overview: While primarily a retirement savings vehicle, a Roth IRA can also be used for education expenses. Contributions to a Roth IRA are made with after-tax dollars, and earnings grow tax-free.
Benefits: Contributions can be withdrawn at any time without penalty, and earnings can be used for qualified education expenses without penalty after five years. This option provides flexibility if your child doesn’t need the funds for education.
Considerations: The contribution limits are lower than other savings vehicles.

Coverdell Education Savings Account (ESA):

Overview: A Coverdell ESA is a tax-advantaged account that can be used for both K-12 and higher education expenses. The funds can be used for various educational expenses, including tuition, books, and supplies.
Benefits: Earnings grow tax-free, and withdrawals for qualified education expenses are also tax-free. This plan offers broader investment options than a 529 plan.
Considerations: The annual contribution limit is $2,000 per beneficiary, and contributions must be made before the beneficiary turns 18. The funds must be used when the beneficiary turns 30 to avoid taxes and penalties. For 2025, you can’t make any contributions if your modified adjusted gross income is more than $220,000 if you file jointly.

Prepaid Tuition Plan:

Overview: Prepaid tuition plans allow you to purchase future tuition credits at today’s prices. State governments typically sponsor these plans, and are designed to help families hedge against rising tuition costs.
Benefits: Locking in tuition costs at current rates can be a smart way to save if you’re confident your child will attend a specific in-state public university.
Considerations: The funds are often restricted to certain schools, and the benefits may be limited if your child decides not to attend a participating school.

UGMA/UTMA Accounts:

Overview: UGMA and UTMA accounts allow you to transfer assets to a minor without creating a trust. The funds can be used for anything that benefits the child, including education.
Benefits: The funds can be used in any way, with no restrictions specific to education expenses. These accounts can hold various assets, including cash, stocks, and bonds.
Considerations: Once the child reaches the age of majority (typically 18 or 21), they gain complete control over the account and can use the funds as they see fit. There are also no tax advantages specific to education savings.

6 Options For Saving For Your Child’s Education

Savings Option	Tax Benefits	Contribution Limits 2026	Flexibility	Investment Options	Usage Restrictions
529 College Savings Plan	Earnings grow tax-free; withdrawals for qualified education expenses are tax-free	Varies by state; often $300,000+ total	High; can switch beneficiaries or change schools	Age-based portfolios, mutual funds, and other investment options	Must be used for qualified education expenses
Traditional Savings Account	Interest is taxed annually	No limit	High; can withdraw funds at any time	Limited to interest-bearing savings account options	No restrictions on usage
Roth IRA	Contributions are after-tax; earnings grow tax-free, and qualified withdrawals are tax-free	For 2026: $7,500 /year (under 50); $8,500/year (50+)	High; can be used for retirement if not needed for education	Wide range of investment options	Can withdraw contributions anytime; earnings penalty-free for education after five years
Coverdell Education Savings Account	Earnings grow tax-free; withdrawals for qualified education expenses are tax-free	$2,000 per year per beneficiary	Moderate; limited to educational expenses	Wide range of investment options	Must be used for qualified education expenses
Prepaid Tuition Plan	Earnings grow tax-free; withdrawals for qualified education expenses are tax-free	Varies by plan	Low; typically restricted to in-state public schools	Limited to specific public institutions	Must be used for tuition at participating colleges
UGMA/UTMA Accounts	Investment earnings are taxed at the child’s tax rate	No contribution limit	High; no restrictions on usage once the child reaches the age of majority	Stocks, bonds, mutual funds	Funds must be transferred to the child at the age of majority

FAFSA: Big win for Grandparents (2025)

Previously, withdrawals from grandparent-owned 529s counted as student income, hurting aid eligibility. Starting with the 2024–25 FAFSA (used in 2025–26), these no longer count, making grandparent 529s a powerful planning tool.

What should I consider when saving for my child’s education?

Balancing education savings with retirement: While saving for your child’s education is essential, remember that you can borrow for education but not for retirement. Prioritize your retirement savings and contribute to your child’s education savings with what’s available after meeting your retirement goals.
Involving your child: As your child grows, involve them in saving and planning for their education. Teaching them about the value of saving and education costs can instill financial responsibility.
Review and adjust: Regularly review your education savings plan to ensure it’s on track. Adjust your contributions or investment strategy as needed to meet your goals. Consider working with a financial advisor to optimize your savings plan.
Utilize scholarships and financial aid: Even with diligent saving, your child may still need additional funding for college. Encourage them to apply for scholarships, grants, and other financial aid forms. These can significantly reduce the amount of money you need to save.

How can I plan for college costs without sacrificing retirement?

The key is to prioritize retirement first. You can borrow for college, but you can’t borrow for retirement. Make sure you’re contributing enough to your 401(k), TSP, or IRA before putting extra funds into a 529 or other education account.

Once your retirement plan is on track, you can set aside money for college—aiming to cover a portion of the cost rather than 100%, since scholarships, financial aid, and even some student loans can help. Keep your investments aligned with each goal’s timeline: retirement savings invested for the long term, college funds gradually become more conservative as your child approaches high school.

Review your plan annually, and adjust as income and goals change. A financial planner can help you run projections so you strike the right balance between supporting your child and securing your future.

Is a 529 still the best way to save for college?

As a financial planner, I frequently receive questions about whether a 529 plan is the most effective way to save for college. While a 529 plan is one of the most popular and effective tools available, it’s essential to consider your unique financial situation and goals before making a decision.

A 529 plan offers significant tax advantages, such as tax-free growth and tax-free withdrawals for qualified education expenses, making it a powerful way to save for your child’s education. Additionally, many states offer tax deductions or credits for contributions to 529 plans, further enhancing their appeal.

However, as explained earlier, it’s not the only option. Ultimately, the best approach is to carefully evaluate all available options and consider how each aligns with your broader financial plan. Consulting with a financial planner can help you make an informed decision that best supports your child’s educational future and your overall financial goals.

What happens to a 529 if a child doesn’t go to college?

You can change the beneficiary, use funds for apprenticeships, repay up to $10,000 in loans, or roll over to a Roth IRA (up to $35,000 lifetime).

Key takeaways

Start early—small contributions grow meaningfully over time.
Prioritize your retirement first; borrow for education if needed, not retirement.
Review your plan annually and adjust contributions as costs or goals change.
Use scholarships, grants, and aid alongside savings to reduce net costs.

How a financial planner can help

A fee-only financial planner can help you evaluate these options in the context of your overall financial situation. They can assist in determining which plan best aligns with your financial goals, risk tolerance, and timeline. Whether you’re looking for tax advantages, flexibility in usage, or a way to lock in future tuition costs, a financial planner can provide personalized advice to help you make the most informed decision for your family’s future.

Ready to build your family’s education plan with District Capital?

Saving for college can feel overwhelming—but you don’t have to do it alone. At District Capital, we help families balance education savings with retirement and other priorities, and navigate the evolving rules (like OBBB 2025 and FAFSA changes).

👉 Schedule a free call with one of our fiduciary financial advisors today.