The average annual cost of attending a four-year public university in the United States — tuition, fees, room and board — runs over $25,000 for in-state students. Private university costs average over $55,000 per year. These numbers climb roughly four to six percent annually. A child born today will face significantly higher costs by the time they are ready to attend. Starting to save early, even in small amounts, compounds meaningfully over an 18-year window.
What a 529 plan is and why it matters
A 529 plan is a tax-advantaged savings account designed specifically for education expenses. Money contributed grows tax-free, and withdrawals used for qualified education expenses, including tuition, fees, books, room and board, and certain technology costs, are also tax-free at the federal level. Most states offer an additional state income tax deduction or credit for contributions made to their own 529 plan. The investment options are similar to a retirement account, typically a range of age-based funds that automatically shift toward lower-risk allocations as the beneficiary approaches college age.
How to open a 529 account
Any adult can open a 529 plan for any beneficiary. You do not need to use your own state's plan, though the state tax deduction may only apply to your home state's plan. Fidelity, Vanguard, and Schwab each offer low-cost 529 plans with index fund options. Your state's treasury or 529 program website will show the plan available in your state and whether a deduction applies. The account takes about 20 minutes to open and requires the beneficiary's Social Security number.
How much to save
A common target is to save enough to cover about half the expected college costs, with the rest covered by financial aid, scholarships, student work, and student loans as needed. For a child born today, saving $300 to $400 per month in a 529 invested in age-appropriate index funds would produce roughly $120,000 to $160,000 by age 18, assuming a moderate average annual return. If $300 per month is not feasible, starting with $50 or $100 per month and increasing contributions with raises or tax refunds produces meaningful results over 18 years.
What happens if your child does not go to college
A 529 plan can be used for qualified expenses at trade and vocational schools, community colleges, graduate programs, and some international universities. If the beneficiary chooses not to attend any qualifying school, you can change the beneficiary to another family member without penalty. Unused funds can also be rolled over to a Roth IRA for the beneficiary starting in 2024, subject to annual contribution limits and a 15-year holding requirement. Non-qualified withdrawals are subject to income tax and a 10 percent penalty on earnings — the original contributions are never penalized.
Start now, even if the amount is small
The single most impactful decision in college savings is starting early. A $100 monthly contribution started when a child is born grows to roughly $37,000 by age 18 at a six percent average annual return. The same $100 per month started when the child is ten grows to about $14,000. The difference is compounding time, not the contribution amount. If college savings is not possible right now, the plan is to start the account with a minimal amount and set a calendar reminder to increase contributions when finances allow.