Tips on Saving for College

Tips on Saving for College - picture of Black college student with backpack next to her

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Earlier this week, Greg wrote a post asking how much input parents should have in their child’s choice of major if they are paying for their college education. Should a parent push toward programs that are in high demand, such as a degree in information systems? Or, should parents simply let their children follow their desires? There was a great discussion with a lot of well thought out answers on all sides of the issue.  While Greg focused on a very specific situation, there is a legitimate question of whether or not parents should be saving for college at all.

This topic seems to stir up all kinds of controversy in the personal finance blogosphere and from moms and dads with differing opinions. On one hand, certain parents may feel that they need to put their own retirement saving first and saving for college should come last, after all of the other puzzle pieces are in place.  Some parents may have taken out student loans themselves and feel like their kids should do the same.  Maybe they feel that it will give them some “skin in the game” and that they could learn from the added responsibility.

Another group of parents that I know feel that it is their absolute responsibility to pay for their kid’s college in its entirety.  Some parents plan their retirement and life plans around being able to pay for their kid’s college – either by paying as they go or by taking on all of their child’s student loans after the fact.  This group of people seems to feel a real obligation toward saving for college for their children, often putting their own goals and interests on the back burner in order to foot the bill.  This may mean delaying retirement or carrying debt much longer than they had intended.

I have to admit that my philosophy falls somewhere in the middle.  Why does it have to be all or nothing?  It certainly doesn’t, and I am trying to find a balance between reaching my own goals saving for college for my children so they don’t owe a bazillion dollars to FedLoan.  I truly think it’s possible to stay on the fast track to retirement while still saving for college.  Here’s how we are doing it.

Saving for College Tip #1: Start Early

Both of my kids have had college savings 529 plans since they got their social security numbers.  Obviously, starting early has put time on our side.  We are hoping that their investments perform well and that the extra years they have to grow will benefit us in the long run.

Saving for College Tip #2: Start Small

In our particular plan, the smallest monthly contribution we can make is $25 per account….so that is where we started.  $50 per month (for two kids) was fairly easy to fit into our budget at first…and as our income continues to grow we keep adding to that amount.  Once we are mortgage debt free in 3 years, we will really jack up our college savings.  Just remember that something is better than nothing!

Saving for College Tip #3: Add Bonus Money

My kids always get money and gift cards for Christmas.  All Christmas and birthday money goes directly into their 529 accounts with no questions asked.  I “buy” gift cards from them.  For instance, last year they both got about $80 of Walmart gift cards for Christmas from various family members.  I deposited $80 in each of their 529 accounts that month (on top of my regular contribution) then used the gift cards to buy groceries.  They didn’t need anything from Walmart!!!

Saving for College Tip #4: Research the Tax Incentives

My state offers a 20% tax credit on the first $5,000 that I contribute to my children’s 529 in any given year.  This means that if I contribute $5,000 to their accounts I get $1,000 back in my state tax return that year….this giving me a 20% return on my money up front.  This is a great incentive for me since I plan on at least partially funding my children’s college anyway.  Why not get an instant return on my investment?  It’s a win-win.

Saving for College Tip #5: Try Not to Feel Overwhelmed

It can be stressful and overwhelming to read about projected college costs and begin to plan for them.  Don’t feel like saving for college for your children is out of your reach.  Just remember that anything that you save will be appreciated and put to good use.

If you really want to feel less overwhelmed about the price of college, calculate what the price would be without any financial aid or tuition, and then see what it is with the financial assistance. This alone should make saving feel somewhat less overwhelming.  It will certainly help to check out financial aid and tuition online to see if you qualify for even more assistance. Every bit adds up, and even a seemingly tiny scholarship can make a difference when it is time to start paying back those loans.

When it comes to your kid’s college, there are many different payment philosophies. Honestly, I don’t think that there is a “wrong” or “right” answer.  I have mixed feelings about it because we know people who are all over the spectrum.  We have friends who are drowning in student loan debt, and we have friends whose parents paid so they got drunk all day during school.  It’s hard not to take other’s experiences into consideration when deciding for ourselves…..but overall, I think that saving something is much better than not saving for college at all.

We decided when we had kids that we wanted to at least help them pay for college, and we truly hope to pay for all of it.  Since our kids are only 3 and 1, it’s impossible to know what the future will hold.  Either way, I know that we will be happy that we have saved something. Hopefully the stars will align and we will be able to save enough so that they can get through school without any loans.

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  1. I don’t have children yet but I don’t think I would fund a 529 account since you have to use it for college, and at the pace things are changing now, I am not sure whether my future children would benefit from a college education or not. I may start a “fund my children dreams” account, be it go to college or start their own business. Your 20% tax credit is certainly a very sweet incentive and time will help you compound a good chunk of college money!

    1. I’m in this camp, I think. Our kid is 9 months old, and unfortunately, we don’t have the cash to fund college just yet (hopefully starting next year). But, scholarships and other variables make me wary of tying my money up in a 529. Still need to have a lengthy discussion with Mrs. iHB about this….

      1. The good news about scholarships, you can take money out of the 529 plan (without penalty) up to the amount of the scholarship and just pay income tax on it, or you can just leave the money in there and it can be a college fund for your grandchildren!

        1. Good point Brian!

          We have actually had this discussion as well. Because it can only be used for college, our plan is to fund it only up to the amount of the tax incentive. After that, we would put the money into some other sort of investment like a mutual fund or real estate.

  2. Great tips! One more thing to consider: Growing up, have them put in say 25% of their money gifts, job income, etc. into the fund. Not too big a percentage, but enough to make them feel they have “skin in the game.” If they know some of their own money is in it, it might give them more of a sense of ownership… and gratitude, since they will have an idea of the sacrifice involved.

    Just listen to me — no kids, but the total authority on parenting! LOL

    1. Elizabeth says:

      From the time my siblings and I were old enough to deliver papers or babysit, we were putting a percentage of our income into education savings. It really added up!

      The bigger bonus of course was that we got into the habit of saving from a young age. When we graduated, it was ingrained in us that a percentage of our income was already accounted for in savings.

    2. Ha! That is a good idea though William. I’m sure we probably will include some sort of a savings requirement from them as they get older. Now, they are just to young to realize it…although the other day my 3 year-old said that she was saving her money for a Christmas present for her sister. How sweet is that?

    3. William,
      Actually that is a great idea. We made our kids put 1/2 of everything they made in savings for college. We paid their tuition, books, fees, rent, food etc but if they wanted beer or anything else – that was on their dime. We also instilled in them the fear that they would be broke after graduation and may not find a job right away so they’d better keep contributing to their savings account, which they did. They both graduated debt-free with a savings account and learned a lot of responsibility in the process. Now they wouldn’t dream of not saving first.

  3. We absolutely plan on helping our kids pay for college, though we do want them to pay for some of it themselves so that they have ‘skin in the game.’ This is how my parents approached our college. My wife on the other hand had zero assistance, and even got hurt taxwise from her Dad claiming her as a dependent. Needless to say, it definitely has motivated both of us to have a plan very early on to help pay.

    As you mentioned, it’s important to take full advantage of the tax incentives with the student savings plans. I definitely will start one very early for each of our children!

    1. My sister and I were like DC’s wife. We really had to fund our own way with jobs and scholarships and our dad cost us each thousands in tax returns by claiming us as dependents. (My dad had the gall to tell my sister she shouldn’t graduate in 3.5 years because if she stayed a student for an extra semester HE would get a significant benefit on his taxes… SHE was paying funding herself at that point and told him where he could put it…)
      I think your philosophy on this is a nice balance, and could be the way that Mr. PoP and I go if we ever end up with little PoPs.

      1. Wow! That takes some gall doesn’t it?

        I never really thought of the fact that a parent claiming a child on their returns would have an impact on their college finances. In the end, my parents paid for my first 4 years, so I can’t complain. I did work all through college, however, to pay my living expenses.

  4. Elizabeth says:

    Good tips 🙂 If I can make a suggestion as a non-parent, it might help for parents to discreetly spread the word about opening up a 529 (or RESP, in Canada) for their kids. This aunt is thrilled to be able to give a meaningful gift to little ones who already have too much stuff and who are too young to know the difference anyway 😉

    1. We aren’t even discreet about it:) We actually have told everybody that they are more than welcome to contribute themselves if they’d like to get the tax advantages. So far, nobody has taken us up.

  5. I had to join the military in order to pay for student loans. I feel when my wife and I do have kids, we will do what her parents did. My wife took out student loans, but her parents would only pay them if she graduated. I would still put money away for my child’s education.

    1. That is a really great stance and, probably, a great motivator. I don’t think that saving for your child’s education is ever a bad decision.

  6. Correction: I meant to say pay for college, not student loans.

  7. I’m with you – I don’t think it has to be all or nothing. Plus, there’s no way to know now what the real price of college will be in 15-20 years so I think it’s hard to guarantee “all.” We don’t have kids yet but I think we will just do what we can to save for their educations alongside our other goals. When they are choosing schools, we’ll just have to see what the lay of the land is at that time. I expect it will be paid for with a mix of savings, cash flow, and student loans (but I hope no parent loans).

    1. I hear ya on the no parent loans:)

      I think that making sure a child chooses a school that they can afford is also a big part of the equation. You can get a great education from a state school for a fraction of the cost. Furthermore, most employers just don’t care where you went. They just want you to be able to do the job.

  8. I don’t have children right now, but I do think I will at least try and save for their college.

    1. It never hurts to start saving early! Get on it as soon as you have children – even if it is just a little bit at a time.

  9. I will probably make the deal my parent’s made with me. I will pay the cost of an in-state school and you can go where you want. I ended up going to an in-state school since I wanted to be an Aeronautical Engineer and the in-state school is top 4 in the country for that.

    We started a 529 for our little guy already (turned 4 months today!) and also get a 20% tax credit on our state taxes. The nice part is my dad is also looking for ways to lower his taxes so he might chip in some too!

    I’ll also make my child a deal that if they get a full ride I’ll buy then a nice car or something (bribes never hurt).

    1. That sounds like a pretty good deal Brian. I think we might include that into our deal as well.

      Congrats on the 529! I think it is really important to start early.

  10. We’re contributing to our daughters education but if what we contribute isn’t enough, I’m fine with that. I expect her to contribute money of her own as well over the years (and of course get a full ride to university! haha)

    1. I’m pretty sure that is where we will end up as well. I don’t think that there is anything wrong with expecting your child to participate some. Of course, if we are lucky enough to pay their whole way, we would do so. However, it will come with stipulations like going to class, holding a certain GPA, and working in the summer.

  11. Great tips. I tend to fall in the middle myself as well, although I lean towards putting retirement savings first. I’ve heard the phrase there’s no loans or scholarships to get through retirement and for some reason that has been in my mind.
    Currently we’re not saving for college as we’ve been putting all we can in our business to get it off the ground. I believe that we probably will start saving some, but will more than likely be a joint effort between us and our kids.

    1. “…there’s no loans or scholarships to get through retirement and for some reason that has been in my mind.”

      Excellent point. That is why we put far more into retirement than college savings.

    1. Yay 529’s! Nice article BTW. I think that I fall into a seperate category: I believe college is huge coming of age experience, but – first and foremost – it should be a preparation for a future career. Of course, that isn’t how I felt when I was a 19 year-old theatre major, but…ah…how we change:)

    1. Good for you! Get it going right away and she will thank you for it.

      BTW – Having girls is so awesome! Congratulations.

  12. We started when our daughter was a few months old and have put $50-$100 a month in college savings for her. If you look at the calculations of what it will cost, this will not come close to covering everything. I was blessed with a good brain and worked my tail off in high school and got a full ride scholarship to a state school. I had to take loans for optometry school, but I think it was well worth it. My husband went to college twice. The first time was with a major in partying and he flunked out on his parents dime. The second time he was in his late 20’s and was always on the dean’s list. He paid his way as much as possible and took out loans for the rest. I would have done well in school even if my parents had paid. I was just that way, but he obviously wasn’t ready and didn’t appreciate it. I’ll help my daughter however I can if she is a good student, but I have no problem if she has to work or take out loans. If she wants to go the party route, she’s on her own.

    1. I was on the party route during my first go around too…however, I was still able to keep my grades up. But I’m with you, if my daughters want to go the party route, they are on their own. If not, then we are going to try and help them as much as we can without hurting ourselves financially.

  13. I’ve only recently left college and my parents helped me out a lot when saving for college they made sure that I took some of the responsibility when saving, setting up a separate bank account transferring a small £30 each month out of my Saturday job’s wages so that I could realise the value of money early. And most of all how to be a frugal saver!

  14. Nice post… I think starting early is the most important point there. With careful planning, anything is possible. We are lucky in Scotland that we get completely free tuition.. i.e. it is paid for by the government

    1. Aaackk!!! You Europeans with your socialized medicine and government sponsored schooling! Give me the freedom to get sick and go broke any day!

      Oh wait…yeah, that is a pretty cool thing for your taxes to pay for isn’t it? 🙂

      1. Nope – I’ll take the freedome to get sick and go broke every day of the week, thank you.

  15. My plan is uber-complicated, so I’ll save it for a blog post….but I love what you did with the WalMart gift cards. You’re right: that money will turn into junk that’ll end up in a landfill in six months if one of my kids were picking at that age…..

    1. Ornella @ Moneylicious says:

      Why do you have to complicate things?! Lol. I’ll be looking forward to reading it 🙂

    2. Yeah, it sure will. I think part of our plan will be your real estate management company idea. I loved that, and it fits right in with our retirement plan as well. Being landlords already, it should be an easy next step.

  16. Ornella @ Moneylicious says:

    Good solid tips….you are right on point about starting early. There’s no need to overwhelm yourself. As your kids inch closer to college, definitely find out how financial aid is calculated and start working on those scholarships. You can always help your kids out with payments if you’d like.

    1. Oh, they will be applying for scholarships!!! 😉 I wish I had applied for more when I was going to school. Honestly, I just didn’t understand the financial aspect of going to college and was too damn lazy to fill out all of the applications. I got a few that I applied for, but there was a lot more money available to me if I would have done the work. Ugh…

  17. “using bonus” money is a great idea. I like to do something similar for my savings account, but haven’t thought to do it for my kids college accounts. Great advice!

    1. Thank you! It works great and it really adds up!

  18. I’m way behind on commenting, but I’m still following along! As for if you should have any say in your child’s major, I’m on the side of “if I’m paying for it, yes!” I want my kids to succeed in life, and although there are many kids who fare quite well picking tech schools and the like, there are also many who fail and have difficulty finding work anywhere with such a specialized academic career. If my child has a genuine talent and verve for a specific degree, that would be a different story, but for the most part, I’m hoping that my children will pick majors more relatable to a bigger spectrum of career choices than a tech or trade school.

    Believe it or not, as I type this, my 11-year-old is whipping up a masterpiece in the kitchen. The kid LOVES to cook…and he’s pretty good at it! So, if this is something that he sticks with and continues to improve upon, we would definitely consider fulling funding his education in the culinary arts. Since he’s just 11 and likes cooking at this point (and has never mentioned what he wants his major to be), it is just an example right now.

    Man, this food smells good! I forgot what I was even typing about. :p

    Onto the topic of the day! Even though we have consumer debt that we’re working on, we are still contributing to our children’s college funds. We’re also still paying for their extracurricular activities and sports. We have found some great ways to cut costs on these things, but we don’t feel like we should punish our children for us having credit card…and medical debt. Hopefully, our smart kids will get scholarships, but we are going to help them as much as we can in case they don’t! 😉

  19. Parents and family could always suggest major subjects or courses for their college child to partake, but not use it as a forceful decision against the child’s wishes. Years ago, I tried a trade school on a heavy suggestion from my parent. I have nothing against it, but the sole reason of me enrolling there was keeping him proud over choosing a major or school for myself in a career that I want to do. Now, I’m taking online courses in mental health industry and getting certified in chiropractics by my decision. I wish I read this article at that moment years ago, because more than likely I would carry more confidance on a career-educated decision with less school debt.

    1. We humans have hectic lifestyles and sometimes getting education may be difficult. As a single parent I have related to the finer points this article is trying to make. Well not all are lucky, I have found distance learning to be at my rescue. Trust me, if your dream is to make it big in the competitive world then distance learning courses may be your lifesaver.

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