College Savings for 2025: Tips and Strategies

As higher education costs continue to rise, saving for your child’s college education has become an increasingly important financial priority for many families. Whether your child is just a toddler or is already in high school, it’s never too early or too late to start planning and saving for their future college expenses.

Take Advantage of Compound Growth

“One of the most important things to remember when saving for college is the power of compound growth,” says Oscar Pelaez, Vice President, David Lerner Associates.  “The sooner you start saving, the more time your money has to grow and compound over the years.”

Let’s say you have a newborn child, and you want to save $50,000 for their college education. If you start saving $200 per month from the day they are born and earn a 6 percent average annual return, by the time they turn 18, you’ll have saved over $72,000. That’s the power of starting early and letting your money grow.

On the other hand, if you wait until your child is 13 to start saving, you’d need to contribute around $400 per month to reach that same $72,000 goal. The lesson here is clear: the earlier you start saving, the less you’ll need to contribute each month to reach your college savings target.

Leverage Tax-Advantaged Accounts

When it comes to college savings, tax-advantaged accounts can be your best friend. Here are some of the most popular options:

1. 529 College Savings Plan: 529 plans are the most popular and widely used college savings vehicles. These state-sponsored plans allow your money to grow tax-deferred, and qualified withdrawals are tax-free for eligible educational expenses.
2. Coverdell Education Savings Account (ESA): Coverdell ESAs are another tax-advantaged option, allowing you to contribute up to $2,000 per year per beneficiary. While the contribution limits are lower than 529 plans, Coverdell ESAs offer more investment flexibility. Be aware that there are limits that apply for people. Suppose you have a modified adjusted gross income over $110,000, or $220,000 (for married couples filing jointly). In that case, you are not eligible to contribute to a Coverdell ESA.
3. Roth IRA: While not specifically designed for college savings, a Roth IRA can be a valuable tool. Contributions are made with after-tax dollars, but qualified withdrawals, including earnings, are tax-free. This can be especially useful if your child receives scholarships or grants, reducing the need for those Roth IRA funds.

Be sure to research each account type’s specific rules and limitations to determine which one (or combination) best fits your family’s needs and timeline.

Explore Other Savings Strategies

While tax-advantaged accounts are often the foundation of a college savings plan, there are other strategies you can consider as well:

1. Automated Savings: Set up automatic transfers from your checking account to a dedicated college savings account. This “pay yourself first” approach can help ensure you save consistently.
2. Workplace Savings Programs: Some employers offer college savings programs or matching contributions. Take advantage of these if they’re available to you.
3. Gift Contributions: Encourage family members to contribute to your child’s college fund as birthday or holiday gifts. They may want a new skateboard electronic device or gaming console, but remember that even small amounts can add up over time.
4. Scholarship and Grant Research: Start researching scholarship and grant opportunities early. This can help offset the overall cost of college and reduce the amount you need to save.

Avoid Common Pitfalls

As you navigate the college savings landscape, be mindful of these potential pitfalls:

1. Overconfidence in Scholarships: While scholarships can certainly help, it’s unwise to rely too heavily on them when planning your college savings. Have a backup plan in case your child receives less in scholarships than you had hoped.
2. Neglecting Retirement Savings: Don’t sacrifice your own retirement savings to max out your child’s college fund. Find a balance that allows you to save for both goals.
3. Investing Too Conservatively: Being mindful of risk is important, but investing too conservatively can mean your college savings don’t keep pace with inflation. Your investment counselor can advise you on the sensible middle ground of investing and create a balanced portfolio that aligns with your timeline and risk tolerance.
4. Overlooking Financial Aid Eligibility: Certain savings strategies, like holding assets in your child’s name, can impact their eligibility for need-based financial aid. Consult a financial advisor to understand the implications.

Saving for college in 2025 and beyond requires a well-rounded approach that considers your family’s unique needs and timeline of your family. By starting early, leveraging tax-advantaged accounts, and avoiding common pitfalls, you can build a solid college savings plan to set your child up for success.

Remember, the sooner you begin, the easier it will be to reach your college savings goals. So, don’t wait – start planning and saving for your child’s future today.

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.