Starting a College Fund

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April 19, 2021

There’s no hiding the fact that paying for college is hard. If you’re planning on going to college, you’ll want to start a college fund as soon as possible.

In 2020, the average tuition cost at a 4-year private school was $37,650 and that number has continued to push higher. The average student who borrows money to pay for school now graduates with just over $30,000 in student loan debt.

One way to reduce the amount that you or your children have to borrow to pay for school is to start a college fund. The earlier you start saving, the more money you’ll have to pay for tuition and other costs, like studying abroad.

First Steps to Start a College Fund

Before you start a college fund, there are a few steps that you should take.

Saving money is a good thing in general, but unless you know how much your education will cost, it’s easy to save too little. You may also save too much, which can be an issue if you use a tax-advantaged account like a 529 plan.

Take some time to estimate the cost of an education. This can be difficult, especially if you’re a parent starting a college fund for a child. 

Tuition prices have risen dramatically in the past few decades and there’s no way to tell whether they’ll continue to rise at the same pace going forward. However, you can take a guess at costs using current prices and historical price trends to give you a target to aim for.

Once you have an estimate for how much college costs, you should consider how you plan to pay for school

Think about how much you want to save and how much you’re willing to borrow. Parents may want to save as much as they can so they can pay for their child’s college costs in-full, but it’s dangerous to do that at the expense of other important goals, like saving for retirement.

Keep in mind that both students and their parents can get student loans to help pay for college. Depending on your financial situation, you may decide to save only a portion of the cost of college and to borrow the rest.

Also, remember that different schools cost vastly different amounts. Community college and public state schools tend to be much cheaper than private schools, which impacts how much you should be saving. 

Choosing the Right Account to Start a College Fund

If you’re starting a college fund for your child, there are a few different accounts that you can use to store the money. Each has unique benefits and drawbacks for you to keep in mind.

529 Plan Accounts

529 plans are a popular choice for people who want to start a college fund. These accounts offer tax advantages when you use them to pay for qualified education expenses.

Money in the account grows tax-deferred and you pay no taxes on withdrawals as long as you use money from the account on qualified expenses, such as tuition or room and board.

Some states offer additional state-level benefits. For example, if you live in Massachusetts, you can deduct up to $1,000 from your state taxable income if you contribute the money to a 529 plan.

If you give your money enough time to grow, these tax savings can be significant.

Another important thing to note is that 529 plans have a smaller impact on need-based financial aid than money in other types of accounts.

One potential drawback of a 529 plan is that you may have to pay a penalty if you use money in the account for non-qualified expenses. If you do this, you have to pay income tax on the earnings portion of the withdrawal, plus a 10% tax penalty. States may also impose additional penalties. 

However, there are ways to avoid these penalties, and a few exceptions

For example, account owners can change the beneficiary of the account to another qualifying family member, using the money for their educational expenses instead. 529 plan funds can also pay for non-college educational expenses, such as a private elementary or high school, as well as trade school expenses.

UGMA/UTMA Accounts

The Uniform Gift to Minors Act (UTMA) and the Uniform Transfers to Minors Act (UTMA) created special accounts that people can use to give money to their children.

With a UGMA or UTMA, an adult can give a financial gift to a minor in the form of cash or other assets. For gift tax purposes, the IRS considers the gift as being given in the year the giver places the money in the UGMA or UTMA. However, the receiving child does not gain immediate control of the funds. 

Instead, the account’s custodian (typically a parent) manages the money in the account on the child’s behalf until they reach legal age.

When the child reaches the age of maturity, they receive full control of the account. They can then use the money in the account for any purpose, including paying for an education.

The benefit of a UGMA or UTMA is that it does not restrict the use of the money in the account like a 529 plan. 

If you’re building a college fund for a child who decides not to pursue higher education, paying the tax penalty to pull money from a 529 plan can be painful. UGMAs and UTMAs let you avoid this.

However, there are also drawbacks to consider. 

One is that custodial accounts don’t offer any specific tax benefits for education. Earnings in the account are taxed at kiddie tax rates, and contributions qualify for the annual gift tax exclusion.

Another is that the child has full control over the assets in the account once they reach the age of maturity. They can use the money for anything, which means they could spend it unwisely, leaving them with no way to pay for school. 

With a 529 plan, the account owner has control over the funds, even if they aren’t the beneficiary of the account.

Coverdell Education Savings Account

Coverdell Education Savings Accounts (Coverdell ESAs) are another tax-advantaged way of saving for educational costs.

Unlike 529 plans, Coverdell ESAs are only available to people who meet minimum income requirements. Additionally, you can only contribute to a Coverdell ESA for someone who is under 18, unless the beneficiary has special needs. You can contribute to a 529 plan for someone of any age, or even for yourself. 

Contributions to a Coverdell ESA are limited to $2,000 per year.

Tax-wise, Coverdell ESAs offer similar tax advantages to 529 plans. Money invested in the account grows tax-deferred. Withdrawals for qualified expenses are also tax-free.

Coverdell ESAs, like 529 plans, also have a smaller impact on need-based financial aid when compared to assets in other accounts, such as UTMAs or UGMAs.

One drawback is that any money remaining in Coverdell ESA has to be removed within 30 days of the beneficiary turning 30 years old. 529s, by comparison, have no time limit or required distributions.

Tips for Funding Your Own College Education

If you’re a student who wants to go to college, building your own college fund can be a good way to help pay for the cost of your education.

Find a part-time job

Working a part-time job isn’t always glamorous, but it’s a good idea for many high schoolers. 

There are many jobs that you can do at night or on the weekends, as well as seasonal jobs that you can find to work over the summer.

While you should prioritize your education and grades in high school, which can help you earn scholarships and get into good schools, working a part-time job has many benefits. The most obvious is that you’ll make money. Set most of your income aside in your college fund but don’t be afraid to use it to have fun once in a while.

Working a part-time job can also get you valuable work experience. The sooner you can start building your resumé, the more success you’re likely to have when you start searching for a job after school. 

You can also learn useful skills from part-time work. If you get a summer job as a lifeguard at a pool or a beach, you’ll likely have to get certified in first-aid, which is a valuable skill.

Depending on the job you choose, you may be able to continue working while you’re in college, giving you income and a way to pay ongoing expenses while you study. For instance, you can find youth sports leagues in almost every city and town, so if you get certified as a soccer referee or baseball umpire you’ll probably be able to keep working no matter where you go to college.

Use the right accounts to save as much as you can

If you’re building a college fund, saving as much as you can will leave you with more money to pay for school. 

However, saving is only one part of the equation. 

If you use the right accounts, you can help the money you’ve saved grow.

The simplest place to keep your college fund is in a savings account. They’re easy to open, safe, and pay interest. 

However, most savings accounts don’t offer good interest rates, so you won’t see much growth. If you go this route, look for an online savings account as these tend to offer better interest rates than accounts from brick and mortar banks.

An option that offers more growth is a certificate of deposit (CD). 

CDs lock your money in the account for a set period of time. Making a withdrawal during this period results in a penalty. However, they compensate for this lack of flexibility with higher rates. 

If you’re 14 and plan to go to college when you’re 18, you could open a 4-year CD so the money is ready for you when you turn 18.

Don’t forget that you can open a 529 plan account for yourself. Some 529 plans offer CDs or other conservative investments that are more suitable for a shorter time horizon. With only a few years until college, you’ll want to keep your risk low in case the stock market drops. 

Supplementing Your College Fund

Saving for college is important, but there are other things you can do to supplement your college fund and reduce the cost of school.

Sign up for Advanced Placement classes

If you’re in high school, signing up for Advanced Placement (AP) classes is a great way to reduce the cost of college.

The typical college degree takes four years, or eight semesters of study. If you take four courses each semester, you’ll take a total of 32 classes during your college career.

Advanced Placement courses give you the chance to take an exam for college credit. If you take four AP classes during high school and pass them, you may be able to get credit for a full semester of classes, meaning you can graduate in three and a half years instead of four.

With the average college tuition at private schools running $37,650 annually, skipping one semester by passing four AP courses can save you over $17,500. Even taking one exam can save you more than $4,000.

Just make sure that the schools you want to attend accept the AP exams you’re studying for.

Apply for scholarships

Scholarships are a great way to help pay for college, since you don’t have to pay them back . Every little bit helps and there are lots of scholarships to apply for.

Many local and regional businesses offer small scholarships. Frequently, these types of scholarships don’t get many applicants, meaning you have a good shot at getting the money if you apply. 

For example, Big Y, a Massachusetts-based grocery store, offers scholarships to students who live near its stores.

Keep an eye out in your local community for these types of scholarships and send applications for the ones that apply to you. 

Also make sure to fill out the FAFSA as early as possible. Some states give out aid on a first-come, first-served basis, so the earlier you apply, the more aid scholarships and grants you may get.

If you can get a few hundred or thousand dollars from scholarships, it can reduce the amount you have to borrow to pay for your education.


College is expensive, but the education you get can be well worth the cost. 

In 2018, the median salary of workers with a bachelor’s degree was $24,900 more than those with just a high school diploma. Building a college fund can mean fewer student loans to pay off and more freedom to use that higher income the way you want to.

A good place to start:

See the best 529 plans, personalized for you