Table of Contents

What is the average cost of college?

How can a 529 plan help? 

How can government assistance and financial aid help?

The bottom line

LearnSaving for CollegeHow Much Should You Save For College?

How Much Should You Save For College?

Jun 21, 2022


6 min read

Saving for college may seem daunting. Financial assistance comes in a variety of forms and can help lessen the costs of paying for college. Learn more about some options.

Many parents (and students) spend years trying to save—or pay off expenses—for a higher education. That’s because college tuition rates have continued to increase over the last four decades at a rate outpacing U.S. inflation. While goods and services typically increase about 3% each year, college tuition rates have skyrocketed—approximately 180% between 1980 and 2020, according to the National Center for Education Statistics. Some estimate that number to be even higher: data from U.S. News & World Report suggests it could be more than 200%.

Turns out, financing higher education might be among the hardest assignments Americans are tasked with. But there are strategies that can make this milestone achievable.

What is the average cost of college?

A child’s college education can be a significant investment for any family.

The average yearly cost of in-state tuition for a student attending a four-year public university during the 2021 to 2022 academic school year was roughly $10,740 (or $42,960 for four years), according to the College Board’s “Trends in College Pricing 2021report.

Tuition costs only continue to climb for out-of-state and private tuition expenses. Out-of-state students at four-year public universities are looking at costs of $27,560 per year, while students at private four-year universities will pay about $38,070 per year. That means students enrolled in private institutions face the highest average costs of attending: roughly $152,280 for four years.

The cost of a four-year, in-state school varies drastically depending on the geographic location. For example, the cost of a four-year state school in California can be dramatically less than a state school in Vermont—roughly $7,000 a year compared to $19,000 annually. 

What about inflation?

Given the rate at which college tuition costs have and are continuing to increase, it can be tricky determining how much college may cost decades away. In today’s volatile times, inflation rates have risen approximately 8.5%, according to the Bureau of Labor Statistics, the highest it’s been in more than four decades. But most experts recommend saving with a 3% inflation rate in mind.

What about costs outside of tuition? 

Tuition isn’t the only thing you pay for when a child is attending college. Other costs include: 

  • Living expenses.

    These costs can fluctuate depending on whether a student is living in student housing, at home, or off campus with other friends or family.

  • Food.

    This may include student meal plans, buying food on one’s own, or a hybrid approach. 

  • Transportation costs.

    These costs can be a mix of public transportation, gas money, or even prepaid fees via apps for bike or electric vehicle rentals.

  • Books, supplies, and materials.

    These class-related expenses can vary depending on the course load, semesters enrolled, method of purchase (buying new versus used or rented), or buying from a college bookstore, an outside retailer, or through an exchange program.

  • Entertainment and travel.

    These costs, too, can change whether attending activities on-campus—sometimes with a student discounted rate (or free)—or off-campus.

How can a 529 plan help? 

Another way to save is with a 529 college savings plan, or what the U.S. Securities and Exchange Commission (SEC) calls “qualified tuition plans.” These are tax-advantaged investment plans designed to encourage people to save for future education expenses. As long as money stays in the account, no income taxes are due on earnings. Money taken out for qualified education expenses such as tuition, books, and school fees, for example, may be withdrawn tax-free. However, there is a 10% tax penalty fee and income taxes on withdrawals made for non-qualified education expenses.

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What to know about a 529 plan

The rules of the 529 plan are laid out in Internal Revenue Service (IRS) code, which explains the qualifications and how it works.

  • All fifty states and the District of Columbia sponsor at least one type of plan.

    These plans can be flexible, in some cases allowing individuals to open in states of their choosing. An account holder may deduct contributions from state income taxes, or qualify for a tax credit.

  • The IRS does not set annual contribution limits for these plans.

    However, federal law does limit 529 balances from running over the expected cost of college expenses. In addition, many states have their own contribution limits. So it’s important to consider all factors when deciding which state to open an account in. 

  • These are flexible plans.

    These plans are flexible in that they can provide an opportunity for parents, other relatives, and even friends to participate. Even if the person chooses not to go to a traditional institution of higher education the money is not lost—it can be used for trade or vocational schools as well. The beneficiary can also be transferred to someone else who might want to pursue a college education in the future.

Types of 529 plans

There are two different types of 529 plans.

  • Education savings plans.

    These more flexible plans have the option to be used at any college or university. An account owner can start this plan to use for qualified higher education expenses including tuition, room and board, and other school-related fees.

  • Prepaid tuition plans.

    Under these plans, the person who sets up the account can purchase credits at participating institutions—usually public and in-state—for future tuition and fees at current prices. It’s sort of like a Forever Stamp: Buy now to lock in current prices for future use. 

Prepaid plans do have limitations: room and board are not considered an eligible expense, they are not widely accepted at every educational institution, and there are no guarantees that the federal governments or states will honor the plans, if say, if the sponsoring school experiences a financial hardship.

How can government assistance and financial aid help?

Financial assistance comes in a variety of forms and can help lessen the costs of paying for college. But potential students and their families may have to do some digging to find out eligibility for these options.

  • Loans.

    This is borrowed money eligible to students and parents that is required to be paid back. It can be used for tuition, books, housing, and other personal expenses. Both federal and private loans are available, with varying interest rates.  For federal student loans, start by filling out the Free Application for Federal Student Aid, or FAFSA, available at

  • Grants.

    Grants are another type of financial assistance, but unlike loans, do not require repayment.

  • Scholarships.

    Similar to grants, this is free money that does not need to be paid back. Organizations, both private and public, offer students different types of scholarships based on various criteria including academic merit, extracurricular activities, or college programs. 

  • Work-study programs.

    This is a type of federal assistance that allows students to receive money while working part-time at specific jobs approved by the college or university. 

  • Forgiveness plans and programs.

    Some student loan holders are eligible for forgiveness of qualifying federal loans. Programs like the Public Service Loan Forgiveness (PSLF) can help college graduates that have entered public service like AmeriCorps or hold qualifying jobs in government, nonprofits, teaching, and the military. It’s important to consider how these different programs work before signing on. For example, PSLF enrollees are eligible for their remaining loans to be erased after 10 years of payments, but only certain types of federal student loans are eligible (althoughrules have been amended during the pandemic).

The bottom line

It can take an education in itself to efficiently save for college. The biggest mistake one can make, though, is not saving anything. While saving for college may seem daunting, consider this: procrastinating won’t help, and may set a child up to carry long term debt. Consider talking to a financial advisor to begin devising a plan.


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