Many parents say college is one of their top savings priorities,1 yet many drastically underestimate how much college costs. High school parents expect college costs to be $22,200 a year, but that number trails both in-state public and private college sticker prices, according to the Fidelity Investments 2021 College Savings & Student Debt Study.2
Without an accurate sense of how much college really costs, parents may wind up undersaving and unprepared for ever-rising higher ed prices. Here's how to figure out how much you may want to save for college expenses.
1. Understand how much college costs
It can be hard to know exactly how much a child's education may cost when there are so many variables that affect the price. Will they go public or private? Will they stay in state or go to a different part of the country? Do they already have college credits from high school or might they start at a community college? And how much could prices go up between now and their graduation day?
Although it may be impossible to estimate exactly what college may cost for your child, looking at the national averages for the type of school you think they'll attend can help you make an educated guess at how much to save.
Average college tuition and cost in 2022–2023
The average cost of a college per year for 2022–2023 is $27,940 for an in-state public college. It's $45,240 per year for an out-of-state public college, and $57,570 for a year at a private college, according to The College Board.3 These figures account for tuition and fees, room and board, books and supplies, and transportation.
Tuition alone for the 2022–2023 academic year costs an average of $10,940 at an in-state public college, $28,240 for an out-of-state public college, and $39,400 for a private college. The average cost of room and board for a college student is $12,310 for an in-state public college and out-of-state public college. The cost jumps to $14,030 for a private college.3 On top of that, there are also additional expenses to consider, like money to cover books, supplies, and transportation to name a few.
2. Set a college savings strategy
Creating a college savings strategy can help you chart a financial course from today until they walk across the stage at graduation. First, sit down and figure out what percentage of their education expenses you want to cover—and what you think you can reasonably afford to save.
According to Fidelity research, just 38% of parents plan to pay for all of their children's college costs. And while most parents hope to cover around 69% of their children's costs, they're generally on track to hit just 27% of their savings goal.2
Knowing what you plan to save can also help you determine what you expect your children to cover for themselves, either through savings, work, or financial aid and student loans. And don't forget to account for contributions that may come from grandparents and other family members, which many parents say will play an important role in the funding of their children's education.1
Once you have an idea of how you'll split up college costs, do some math to determine your total savings goal. For example, if you're aiming to pay for 69% of college costs at a state school, your goal is about $77,000, based on 2022–2023 data. Divide that by the number of years until your child turns 18 to come up with your annual savings goal. But remember, historically the cost of college has increased year over year, so it's important to consider the estimated cost of college for when you'll be paying it, not just for today. Check out the Fidelity college savings calculator for help estimating future college costs.
And want help on how to get there? Fidelity's Planning & Guidance Center offers tools to help you figure out how to best save to reach your financial goals. You can also check out Fidelity's Life Events guide to saving for college for more resources and tips for saving throughout your kid's life.
Read more: How to save money
3. Explore the best accounts for saving for college
Different accounts offer different benefits when saving for college.
A 529 plan is a tax-advantaged way to save for educational expenses. Money saved in a 529 has the potential to grow tax-free and can be withdrawn federal income tax-free, if that money is used to pay for qualified educational expenses. 529s are offered in almost every state, and you may get an income-tax break if you make contributions to a 529 offered by the state you live in.
529s have no income restrictions and are flexible in the sense that you can change the beneficiary to be another family member at any time. Plus, family and friends can make contributions on a child's behalf. They're limited in the sense that they can only be used for qualified educational expenses, though this includes K–12 tuition, certain apprenticeship costs, and even some student loan repayments,4 in addition to college costs.
If you want to use 529 funds for non-education expenses, you may have to pay taxes on the investment gains, as well as a 10% penalty. You may have to pay state or local income tax, interest and dividends tax, or the equivalent.5
Uniform Gifts to Minors Act (UGMA) /Uniform Transfers to Minors Act (UTMA) accounts are investment accounts opened in a child's name. All money contributed must be used for the benefit of that child. Unlike with a 529, the beneficiary cannot be changed. UGMAs/UTMAs can be used to cover costs beyond educational expenses, which may make them good fits for parents who may not be sure their child will attend college.
Keep in mind that while the account's custodian (typically a parent) manages the money held in a UGMA/UTMA when a beneficiary is a minor, the child normally gains access to the account between the ages of 18 and 25, depending on state law, and can use account funds for whatever they wish.
UGMA/UTMA funds are considered a child's assets, rather than a parent's, which may lower the amount of financial aid a child is eligible to receive.
Coverdell Education Savings Accounts (ESAs)
Like 529s, Coverdell ESAs allow you to contribute money for a child's college costs, invest it, defer potential taxes on any gains while the money stays in the account, and then withdraw it federal tax-free, provided you use it for eligible educational expenses. Keep in mind too that ESAs allow you to self-direct your investments giving you added flexibility, unlike 529 plans which can have very limited investment options.
But there are some key differences: You are only able to contribute up to $2,000 a year. This limit is reduced for higher income earners until it's phased out entirely for those making more than $110,000 as single filers and $220,000 as joint filers. Funds also must be used by the beneficiary (or reassigned to another beneficiary) by the time the original beneficiary turns 30. Gains from money held in a Coverdell not used for qualified educational expenses are subject to a 10% penalty, plus any applicable taxes.
You can use taxable brokerage accounts—or even savings accounts—to save money for college tuition and other expenses. Although non-specialized accounts lack the tax benefits of more specialized options, they do offer increased flexibility. Taxable brokerage accoutns have no maximum contribution limits, and can have less restrictions on investment options than most specialized accounts.