Is It Too Late To Save For College?

Preparing for a child's college education can often be daunting, and many families wonder if they have waited too long to begin saving— an understandably common concern given that college students and their families pay 48 percent of college costs out-of-pocket. However, even if you have only recently started thinking about saving for college, there are several approaches that may prove to be beneficial.¹

Start Where You Are

One of the key aspects of college saving is starting with what you can manage now. Contributing regularly, regardless of whether the amount is large or small, can add up over time. Remember, compound growth can be an effective tool, potentially helping to increase the value of your savings as they accumulate over the years. If you’re starting later, you might not have the power of compound interest but every dollar set aside may help your college student.  

Explore Various Savings Options 

It may be useful to explore different savings options. While 529 Plans are a popular choice due to their tax advantages, there are also other accounts, such as Coverdell Education Savings Accounts or traditional savings accounts, that might fit into your strategy. Each account type has its own benefits and limitations, but one thing is for sure: Americans love their educational savings options. Nationwide, 529 Plan savings totaled $508 billion in 2024 for an average account balance of $30,295.²

A 529 plan is a tax-advantaged college savings plan. Before choosing a plan, it's important to consider not only the state tax treatment but also any associated fees and expenses. Availability of a state tax deduction will depend on your state of residence, as state tax laws and treatment may vary from federal tax laws. If you make nonqualified distributions, earnings will be subject to income tax and a 10 percent federal penalty tax.

Coverdell Education Savings Accounts allow individuals to save for education expenses on a tax-advantaged basis, subject to limitations. Contributions to a Coverdell ESA aren’t tax-deductible, but the account accumulates on a tax-deferred basis. Withdrawals are not taxed as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30, or taxes and penalties may occur.

529 Plans and the SECURE Act

A new rule allows a 529 account holder to move money to a Roth IRA account under certain conditions. The main benefit of this new rule is that it removes some of the uncertainty regarding whether your kids will need the 529 money or whether you may have overfunded the account.

To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.

Engage in Financial Aid and Scholarship Opportunities

In addition to savings, investigating financial aid and scholarships can play a crucial role in funding college education. Encouraging your child to excel academically or participate in extracurricular activities can open doors to various merit-based scholarships. In fact, Scholarships and grants cover 26.4 percent of college costs on average. Ready to get started? Completing the Free Application for Federal Student Aid (FAFSA) is a crucial step in identifying any need-based aid that might be available.^3,4

Ready to Explore Your Options?

While starting later can feel overwhelming, taking proactive steps today can make a meaningful difference in shaping your child's educational future. A financial professional may be able to provide insights and guidance that align with your family’s aspirations. It's never too late to prepare for tomorrow's educational journeys.