Key Points on Saving For College & How to Do It

Covering the costs of college is a combination of funding sources for most students and parents. There is “free” money like grants and scholarships, student loans that need to be repaid and out of pocket payments from income and savings. Grants and scholarships are the most preferable source that everyone wants, but not everyone qualifies for. Student loans are extremely common, but no one wants one except for necessity purposes. This leaves income and savings as a prime method of paying the bills. The problem is that the costs of college have increased at a rate faster than inflation for over twenty years, making it harder to save, and the average income of most American families has dropped.

Despite these challenges, it is by far most effective to pay for college by having savings because of the following reasons:

Enable Greater Choice for School

Often times when deciding on a college, it is financial constraints that dictate the choice.
The school that can provide the best education at the lowest cost becomes the destination. However, the lowest cost college or the one offering the biggest scholarship may not be the right choice for you. If there is enough money saved, the student can choose to attend a school based on academic needs and quality of the institution instead of worrying about qualifying for scholarships that may or may not materialize.

Tax Deferral

529 plans offer tax free growth of money in the account as long as it is used for educational purposes. This makes it a valuable savings tool.

It is Cheaper to Save than Borrow

Borrowing is more costly than saving because of all the interest that has to be paid back. Just make sure any money saved is put into a qualified 529 plan. Saving money in non-qualified investments are subject to normal taxes when they are redeemed. Pulling money from retirement savings to pay for tuition is a bad idea because one can borrow for school, but cannot borrow for retirement and can be subjected to normal taxes plus a 10% penalty.

Avoid the Coverdell Educational Savings Accounts

The assets are put in the student’s name and weigh heavily against financial aid eligibility, leading to my next point…

Don’t Save Any Money in the Child’s Name!

The FAFSA allocates 20% of the child’s assets as part of calculations to determine financial need. They only count 5.64% of parent assets towards the calculation. This makes it a waste of time for students to save money in their own checking or savings accounts. Use the 529 plan to save the most money effectively as it is designed to benefit the student while being weighed at only 5.64% value as a parent asset.

While the above might be obvious, that brings us to our next point – How exactly do parents and college students maximize on savings? We’ve got you covered.

Saving for College as a College Student

  1. Pay yourself first & budget your personal expenses – No matter whether you’re a college student or not, pay yourself first – even if you can only afford to put away a small amount. When it comes to budgeting, always look for ways to pay less for your toiletries, clothing, and entertainment. Cut coupons, wait for sales, and buy generic rather than name brand. Take advantage of free movie nights, concerts, and festivities on campus. Doing both will help prepare you to spend responsibly in all stages of life while also allowing you to build up an emergency fund in case something unexpected happens.
  2. Choose a Smaller Meal Plan – Dining costs are a big part of your college budget, so save big by opting for a smaller meal plan and having a quick breakfast in your room (instant oatmeal is your friend). If you’re lucky enough to have a campus apartment with a kitchen, you can start “meal prepping” for the week. Crock pots can be a great way to make several meals with little effort. These little decisions will accumulate over four years, adding up to substantial savings.
  3. Save on your books – The cost of textbooks and materials for a full-time undergraduate student averages $1,200 a year, but you can reduce that figure by avoiding the school’s bookstore. Instead, shop for used books on and, or consider renting your books on and Some students are able to share books with classmates and purchasing the digital copy is usually less expensive.
  4. Leave your Car Home – If you’re wondering how to save money while in college, consider leaving your car at home. Having a car at school is a big expense, and gas, maintenance, and insurance can really add up. Instead, consider using public transportation, university transportation, or bike whenever possible. When you do need a car, you can rent one for a few days or use a service like Zipcar or Car2Go if you only occasionally drive.
  5. Use your student discounts – One of the many great things about being a student is the fact that there are countless discounts available to you. Whether you’re at the bookstore, a retail store, a restaurant, or the movies, ask about their student discount and you may be able to take a certain percentage off your total bill.

While the tips above help college students form habits that will be sure to help them beyond-college, a recent national Gallup survey revealed that saving for college is a top financial concern for parents. When it comes to family saving, 529 plans are widely considered to be the best way to prep for college.

Here’s everything parents need to know about saving for college with 529’s

You can increase college options and help reduce student loan debt for your family with 529 Plans.

If you haven’t started saving yet, start now. When you save, you earn interest. When you borrow, you pay interest and incur long-term debt. There are many different investment vehicles you can use to save for college. Tax-advantaged 529 Plans are widely considered to be the best way to save for college. To date, more than $355 billion have been saved in approximately 12.5 million accounts.

What is a 529 Plan?

Congress established 529 Plans to enable states to offer tax-free incentives and special benefits to encourage students, parents, and grandparents to save for college. Currently, 49 states, including New York and New Jersey, offer over 92 savings plans.

Looking to be convinced? Here are some unique benefits of 529 Plans:

  • Tax-Free Benefits: Savings grow federal and state income tax-free. Withdrawals qualified higher education expenses are also exempt from federal and state income tax. In addition, some states offer a state tax deduction for contributions to their 529 plans.
  • Ownership Control and Flexibility: The account owner retains complete control of the account and has the ability to:
    • change the beneficiary of the account at any time to an extended member of the family
    • change ownership of the account
    • control and direct all distributions
    • reclaim all funds in the account subject to a 10% penalty on the earnings portion only.
  • Minimal Financial Aid Impact:529 savings are treated as a parental asset when financial aid is calculated which means only 5.64% of the account’s value is used when determining your expected family contribution (EFC) each academic year. It is the same treatment as a bank savings, CD or investment account
  • No Income or Age Limit: Anyone can open a 529 account, regardless of income level and age. There are no age restrictions on beneficiaries you can set up an account for a child, teenager, adult, and even yourself
  • Easy to open and low cost: Most plans have very low minimum monthly contributions (some as low as $15) limits making them attractive to families regardless of income level. Contributions can be made conveniently through payroll deduction or automatic transfers from a bank account
  • 529 savings can be used at virtually any college. Funds can be used at virtually any accredited college in the country including technical, career, two and four-year colleges and graduate schools. Funds can be used to pay for tuition, fees, room, board, books, supplies and required equipment and even off-campus housing.
  • Generous Estate Planning Benefits: Special estate planning and gifting features enable you to reduce your personal taxable estate through accelerated gifting. You can make five years’ worth of gifts (up to $70,000; $140,000 for married couples filing jointly) in one lump sum per beneficiary and avoid incurring a gift tax on this amount. Important to know that even though the account owner totally controls the funds in the 529 accounts, these moneys are not considered part of their estate for estate tax purposes. Maximum contribution limits up to $400,000 per beneficiary with no maximum account balance limit.
  • Bankruptcy Protected: 529 plan assets are protected from bankruptcy provided they have been in the account for longer than two years.
  • Professional Investment Management with Diversified Investment Options: A wide choice of investment options such as FDIC insured savings and stable value accounts, individual mutual funds, age-based investment portfolios are available and managed by many of the nation’s leading financial service firms.

In summary, Section 529 is one of the most generous and flexible tax provisions ever passed by Congress, as they provide extraordinary benefits to encourage families to save for college and avoid taking on long term student debt.

The most important step is to develop a savings strategy that is right for your family to help provide your children options for college and avoid student loan debt. Save as early as possible and systematically and know that it is never too late to start.

To learn more and compare 529 plans and other tax-advantaged college savings vehicles go to

LendKey recognizes that prepping for college financially can be tough. Should you need to turn to private student loan options, we’ve got you covered.

Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.