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Investing 101: Tips to Help You Save for College

It's no secret that college costs are spiraling upward. Between 2007 and 2017, the average cost of a single year at a four-year public school—including in-state tuition, fees, and room and board—rose from $15,930 to $20,770, according to a survey by the College Board.1 The average price of a year at a private school rose from $37,600 to $46,950.

That amount doesn't even include costs like books, supplies, transportation and other expenses. All together, four years at a public school now costs roughly $100,000, while the bill for a private education could run twice that amount or more.2

These daunting figures are why so many people turn to special tax-advantaged accounts called 529 plans to help save for college—and as of January 1, 2018, even private K-12 tuitions. These state-sponsored programs allow parents, relatives and friends to contribute money to support a child's (or any person's) education. The money can be invested in the stock or bond market until it's time to start paying school-related bills, and the investment income and capital gains aren’t subject to federal income taxes (and possibly state taxes), which makes it easier to build savings.

But there's a caveat: The tax benefits apply only if you spend the money on "eligible" expenses.3 In broad terms, you can think of these as the essentials—such as tuition and fees, textbooks, room and board, and even computers and Internet service—so long as they're required by the school. The tax penalty for spending on ineligible items can be steep—you'll have to pay income taxes and a 10% penalty on any of the investment gains you've spent. 

So although 529 plans remain a valuable savings tool, they also have their limitations. If you're concerned about covering all college costs, it's worthwhile to consider alternate saving options for common expenses not covered by 529 plans.

  • Living off campus? You can use money from a 529 plan to pay for off-campus rent and groceries—but only up to a point. Anything you spend above what it costs for a student to live and eat on campus won't be considered an eligible expense by the IRS. To find out more, check with the school's financial aid office and be sure to keep your receipts.
  • Planning to travel? You can't use 529 funds to pay for the costs of traveling to and from college or a trip home for the holidays. Spring Break trips are also out. So are any costs arising from commuting, public transportation and parking fees.       
  • Studying abroad? You can use 529 funds to pay for education-related expenses and room and board overseas—but the amounts will be based on the school's budget calculations and won't reflect currency differences. Weekend trips aren't eligible. You can also use 529 funds to pay for tuition at an overseas university. Check here to see if a particular school is on the list.
  • Medical expenses? You can't use 529 funds to pay for medical bills.
  • Extracurriculars and socializing? You can't use 529 funds to pay for entertainment. That applies to on-campus movies, concerts and sporting events, as well as any costs related to participation in clubs, sports or groups like fraternities and sororities.
  • Furnishing a room? You can't use 529 funds to pay for bedding, furniture, decorations, lamps, storage, TVs or microwaves for a student's room. Nor can you use such funds to buy clothes.

529 plans may not cover every single cost, but this tool can definitely help you cover the lion's share of your college bills without risking any tax penalties.

1"Trends in College Pricing 2017," College Board, 2017.

2"Trends in College Pricing 2017," College Board, 2017.

3"IRS Publication 970, Tax Benefits for Education," 2017.

What You Can Do Next

What about the expenses not covered by 529 plans? Among various taxable accounts, Schwab Intelligent Portfolios® has a few options that could help.

  • Individual investment account. A regular Schwab Intelligent Portfolios investment account can be a powerful savings tool. Complete a simple questionnaire to build a portfolio of hand-picked low cost exchange-traded funds (ETFs). The portfolio is automatically monitored and rebalanced as different investments rise or fall in value. 
  • Custodial account. With a custodial account, an adult can set up and manage an investment account on behalf of a minor. As soon as the child reaches age 18 (or, in certain states, 21), he or she can take full control of it. Note that if large amounts of money are involved, tax issues can arise, as well as a possible impact on college financial aid.
  • There are many tax, ownership, eligibility and investing differences between these types of accounts. Call us at 888-213-4695 or visit your local branch to discuss your options with an investment professional.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investors should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state’s qualified tuition program.

Before opening and investing in a 529 plan, carefully consider the information contained in the 529's official statement, including investment objectives, risks, charges, and expenses. You can request an official statement from the specific plan sponsor. Please read it carefully before investing.

Please read the Schwab Intelligent Portfolios disclosure brochure for important information, pricing, and disclosures relating to Schwab Intelligent Portfolios.

Schwab Intelligent Portfolios® is made available through Charles Schwab & Co. Inc. ("Schwab"), a dually registered investment adviser and broker-dealer. Portfolio management services for Schwab Intelligent Portfolios® are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"), a registered investment advisor. Schwab and CSIA are affiliates and are subsidiaries of The Charles Schwab Corporation.

Diversification, automatic investing, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.


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