If you're overwhelmed by the thought of saving for college, you're not alone. The cost of higher education continues to rise, with U.S. students accruing roughly $1.81 trillion in student loan debt in 2025. This underscores the importance of saving for college as early as you can.
The good news is, you have a lot of strategies at your disposal, including accounts specifically designed for education. Start by understanding the available accounts and scholarships to level set and help you make a plan for your savings strategy.
Read more: Save for your loved one's education with Ally Bank’s buckets and boosters
Know your college savings plan choices
As you begin saving, remember that you don’t have to stick to just one account or strategy.
What is a 529 plan?
A 529 plan is a state-by-state college savings tool that can help individuals save and invest for educational expenses, with potential tax benefits. Additionally, unused funds have the potential to be rolled over into a Roth IRA for the same beneficiary without penalty, subject to rules and limitations.
Types of 529 plans
Consider two primary plans:
College savings: Invest your money in various investment funds, such as mutual funds and exchange-traded funds (ETFs), and use them at any eligible college.
Prepaid tuition: Lock in current tuition rates for future use at specific, often in-state, public institutions.
Other college savings choices
You can also save for your loved one’s education using other accounts, including:
Coverdell education savings accounts (ESA): ESA contributions are made after-tax. Distributions may have a tax benefit if certain rules and limitations are met.
Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) custodial accounts: UTMA or UGMA accounts act as savings or brokerage accounts created in your loved one’s name, with you (or another adult) acting as the custodian.
Roth IRA: For a penalty-free withdrawal of earnings, the money must be used for qualified higher education expenses.
Deposit accounts: When you use a savings account or a money market account there are no contribution limits or tax implications linked to withdrawals.
Trusts: If you open a trust for education, you can better ensure the funds are used for the intended purpose.
Leveraging tax benefits while saving for college
Consider savings strategies that leverage tax-advantaged accounts and explore state-level incentives that can help you make the most of your available tax benefits.
Understand tax advantages
Depending on the accounts you choose, contributions and future withdrawals for qualified expenses may have a tax benefit, if certain rules and limitations are met. Remember to contribute early if you can so you can maximize the tax-deferred growth period and allow your investments to potentially compound.
For 529 plans, keep in mind that contributions could be considered gifts for tax purposes, they could be made tax-free by using the annual gift tax exclusion. Be sure to consult a financial advisor for guidance.
Research state-specific benefits
While most states with a tax benefit require you to contribute to your own state’s 529 plan to claim it, some states offer tax benefits for contributions to any state’s plan – be sure to check the benefits available in your state.
Navigating financial aid and scholarships
Consider filing the Free Application for Federal Student Aid, known as FAFSA, to maximize scholarships, grants, work-study (where your loved one works and earns a paycheck at school) and federal student loan opportunities. Be sure to check what financial aid your family may qualify for, as there are often more financial opportunities than you may think. For example, unclaimed Pell Grants totaled $4.4 billion for the high school class of 2024.
Tips for effective college savings
These strategies can help you make the most of your college-saving efforts:
Start early and stay consistent
No matter which strategy you choose, the key is to start your savings plan early. You can begin by creating a monthly savings plan that you consistently follow and adjust as necessary based on your financial situation.
Consider involving family members
Grandparents and other relatives can also open and put money in a 529 plan and receive potential tax benefits. You can also consider putting holiday and birthday money toward college savings.
Investing in their future
Starting early and staying consistent may help your loved one reduce the need for future debt and expand their available educational opportunities.
