Raising a child is likely the most expensive thing you’ll ever do that isn’t a house. A Brookings Institution study put the cost of raising one child in a two-parent household at roughly $300,000 in today’s dollars, about $18,000 a year, and that figure excludes college entirely. Between day-to-day costs, education, and other milestones down the road, it’s worth having an intentional plan rather than figuring it out as expenses arrive.
Saving for College
The average student spends around $35,551 a year on college expenses. A 529 plan is usually the first tool people reach for: you contribute after-tax dollars, the funds grow tax-free, and qualified withdrawals for tuition, room and board, and required supplies come out tax-free too. Use the money for something that doesn’t qualify and you’re looking at a 10% penalty plus income tax on the withdrawal.
There are two types. Pre-paid tuition plans let you lock in today’s tuition rates at a specific public or private institution, which controls for future inflation but restricts you to tuition only and limits your investment choices; not every state offers one. Education savings plans are more flexible: you can use any state’s plan regardless of where you live, and some states offer a tax deduction or credit for using their own plan. Many families stay within the annual gift tax exclusion when contributing so the amount doesn’t have to be reported as a gift. One planning detail worth knowing: if the 529 account is owned by a grandparent rather than a parent, it isn’t counted as a parental asset on the FAFSA, which can preserve more financial aid eligibility.
Other Education Vehicles
Coverdell Education Savings Accounts (ESAs) offer more investment flexibility than 529 plans and can be used for K-12 expenses without the $10,000 annual cap that applies to 529 withdrawals for those years. They’re more restricted, though: contributions are capped at $2,000 per beneficiary annually, income limits apply, and the account must be emptied by age 30 or the remaining funds are taxed.
Custodial accounts (UGMA/UTMA) offer the most investment flexibility of any of these vehicles and aren’t limited to education spending at all. The tradeoff is that the child becomes the legal owner of the account at 18 or 21 depending on the state, with full control and no obligation to use the funds for school, and custodial accounts count more heavily against financial aid eligibility than 529 plans do.
I bonds are a less obvious option: if you cash them in the same year you use the proceeds for qualifying education expenses, and your income falls under the applicable limit, the interest can be excluded from your taxable income entirely.
Beyond College
Not every future expense is education. A separate brokerage account earmarked, but not restricted, for your child can cover things like a first car, a wedding, a down payment, or a gap year, while staying entirely in your name and under your control. That flexibility comes at the cost of no direct tax advantage.
A reasonable approach for most families is to spread contributions across two or three of these vehicles rather than putting everything into one, starting with whatever you can afford now and adding accounts as your income grows. Involving your child in the tradeoffs, what a state school with a scholarship looks like versus an out-of-state school funded mostly by loans, turns the planning itself into one of the more useful financial lessons you can give them.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
