When your child is in elementary school, college can feel like a distant milestone. But then you realize that milestone is only about a decade away — and you haven’t started saving yet.
The rising costs of higher education can feel overwhelming, but the good news is it’s not too late to take action. If you’re not sure where to start, it may be smart to consult with a financial advisor to devise a plan.
With thoughtful planning and smart investment strategies, you can grow money for your child’s future without taking on too much risk. Here are five ways to get started.
1. Set a realistic goal
The first step is figuring out how much you need to save. During the 2022–2023 academic year, the average total cost for full-time undergraduate students living on campus was $27,100 at a public nonprofit four-year institution, while the cost for a private nonprofit school was $58,600, according to the National Center for Education Statistics.
When it comes to big-ticket expenses like college, planning ahead is key. However, estimating how much to save for college can be tricky. Costs vary a lot depending on multiple factors, including:
- Whether your child goes to a public or private university.
- Whether they go to a two-year or four-year school.
- Whether the school is in-state or out of state.
- How much financial aid they receive.
- If they live on campus, off campus with family or off campus with roommates.
That said, it’s important to take the time to run the numbers for different scenarios so you can calculate the total cost of their education. This way, you know the ballpark figure you’re aiming for.
Once you have a number (or a range) in mind, you can decide how much to allocate to that goal. Many experts suggest aiming to save about one-third of the expected cost. The other two-thirds can come from a mix of student loans, grants, scholarships or a part-time job in school. Of course, that’s only a guideline — you can choose to save more or less depending on your financial situation.
Speaking with a financial advisor at this stage is a smart idea, especially if you’re feeling overwhelmed.
An advisor can help you calculate future college expenses based on your goals and budget, factoring in inflation and any potential financial aid or scholarships your child might receive. With a clearer target in mind, you’ll feel more confident taking the next steps.
Bankrate’s AdvisorMatch can connect you to a financial advisor in minutes to help you achieve your financial goals.
2. Explore investment account options
Once you’ve set your goal, it’s time to choose the right investment account for your child’s education. Here are three popular options to consider.
529 plan
A 529 plan is specifically designed for education savings. It offers tax-deferred growth, tax-free withdrawals for qualified educational expenses and even state tax deductions in some cases. Plus, the funds can cover other education-related costs such as room and board, books, and supplies.
Over the years, 529 plan benefits have become even more flexible. They can now cover K–12 private school tuition and up to $10,000 to pay off the beneficiary’s student loans.
When it comes to investments, 529 plans offer a wide range of options, from higher-risk, higher-return choices like stocks to safer, lower-return funds, so you can customize your strategy based on your goals and risk tolerance.
You also get more control over when money in the account is withdrawn.
“Parents tend to prefer the 529 plan because they’re the account owners — not the minor,” says Joe Conroy, a certified financial planner and owner of Harford Retirement Planners. “This means the assets count less against the student for financial aid, and the parents remain the decision makers even after the minor reaches the age of maturity.”
And this type of investment account can be especially useful if you have multiple children.
“With a 529, you can switch the beneficiaries from one child to another without triggering a tax consequence,” says Conroy.
Custodial account (UGMA/UTMA)
A custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) is another way to invest money for your child’s future.
These accounts come with some useful tax perks, although they’re a little more complicated than 529 tax rules. A portion of the gains is tax-free, another part is taxed at your child’s income tax rate (typically lower than yours), and the rest is taxed at your rate.
However, UTMA/UGMA accounts have some downsides compared to 529 plans that are worth considering. First, because these accounts are held in the name of the child, they tend to hurt financial aid eligibility more than comparable 529 plans.
And once your child reaches the age of majority (typically 18 or 21, depending on your state), they’ll gain full access to the funds and can use them for anything — not just education.
That might be too much flexibility. You’ll need to decide if your child has the emotional maturity to use the money wisely — which might be hard to gauge when they’re still in elementary school.
“You may want your son to use the money for school, but he may want to buy a Corvette with his custodial account money,” says Conroy. “Legally, they’re allowed to.”
Custodial Roth IRA
A custodial Roth IRA is another option if your child has earned income from a part-time job.
Daniel Goodman, a certified financial planner and founder of Good Better Best Financial Planning, says a custodial Roth IRA can be beneficial because it gives kids hands-on experience saving and investing for the future.
“When kids use their own money to help pay for college, they often value their education more,” says Goodman. “They see firsthand the sacrifices being made and it gives them real skin in the game.”
Money in a custodial IRA grows tax-free, and qualified withdrawals in retirement are also tax-free. While this is primarily a retirement account, Roth IRAs allow penalty-free and tax-free withdrawals of contributions (but not earnings), so your child could take contributions out tax-free for college.
While your child is under 18, you’ll oversee the account’s assets. Once your child reaches the legal age in your state, the custodial Roth IRA transitions to a regular Roth IRA in their name. Before making the switch, take time to explain what’s happening and ensure your child understands how to manage the account and keep contributing to it for their future.
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3. Pick your investments
Now that you’ve chosen an account, it’s time to decide how to invest the money. With 10 years to go, you’ll want a mix of growth and stability.
The key is diversification. Spreading your investments across different asset classes — or buying index funds that diversify investments for you — reduces risk and helps you weather market fluctuations.
“With a 10-year time horizon, I would generally recommend investing aggressively in a diversified mix of nearly all stocks,” says Conroy. “Usually in those accounts, you can pick funds or ETFs that give you the diversification you’re looking for yet are still aggressive enough to give the potential growth.”
Goodman is a fan of target-date funds, which are designed to automatically adjust your investment mix as your child’s college years approach.
“They’re a great option if you don’t want to handle rebalancing on your own,” says Goodman. “They automatically shift to more conservative investments as your child approaches 18.”
Costs vary for target-date funds, so make sure to check fees. But the convenience of automatic rebalancing can save you a lot of time and stress, says Goodman.
If you decide to go with other investments, make sure to reassess your asset allocation each year.
“Your investment strategy can’t stay the same the entire time,” says Goodman. “You need a plan to gradually reduce risk as college gets closer.”
This might look like shifting your allocations from stocks to bonds or money market funds.
“Don’t wait until the last minute — start adjusting slowly,” says Goodman. “Otherwise, if the market drops right when you need the money, you could be forced to sell at a loss.”
4. Use windfalls to beef up investments
Did you get a bonus from work? A generous tax refund? Maybe grandma and grandpa gifted your child some cash for their birthday. Consider using these windfalls to funnel extra money to your child’s college savings fund.
Instead of spending this unexpected money on short-term wants, deposit it into your chosen investment account. These occasional boosts can make a significant difference over time. And with just 10 years to invest, you’ll need to take advantage of as many shortcuts as you can.
5. Review your progress annually
Saving for college isn’t a one-and-done task. Schedule an annual check-in to review your progress, either by yourself or with a financial advisor. Do you need to adjust your contributions or investment strategy?
Life changes — like a new job, a pay raise or an unexpected expense — can impact your savings plan, so it’s essential to stay flexible and make adjustments as needed.
“No matter which path you choose, don’t just ‘set it and forget it,’” says Goodman. “Check in regularly to make sure your plan still makes sense.”
Don’t neglect your retirement for college savings
It’s natural to want to give your child the best start in life, but experts say you shouldn’t sacrifice your own financial future in the process.
Remember, your child can take out student loans for college, but there’s no financial aid for retirement.
That’s why it’s important to strike a balance between saving for college and your own retirement. Make sure you’re contributing to your 401(k) or IRA and have a solid retirement plan in place before prioritizing college savings.
This way, you’re not working longer than planned or putting a financial strain on your kids down the road. You should also encourage your child to apply for scholarships, grants and part-time jobs to help bridge the gap.
And make sure to have honest and open conversations with your child about the cost of college. Let them know early on how much you’re able to provide and explore ways to limit student loan debt.
This might include starting their education at a community college, choosing an in-state university or applying for scholarships.
“Help your child understand the value of every dollar going toward college,” says Goodman. “When they feel invested in their future, the whole experience means so much more.”
Bottom line
Saving for college with just 10 years to go might seem daunting, but it’s never too late to start. By setting realistic goals with the help of a financial advisor, choosing the right investment accounts and staying consistent with your contributions, you can make significant progress in a relatively short amount of time.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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