What will college actually
cost by the time they go?

Field guide

Why college costs outpace general inflation.

US college tuition has increased at roughly 4–6% per year for the past four decades — roughly double the rate of general consumer price inflation (CPI). A degree that cost $20,000 per year in 2000 costs over $55,000 today at many private universities, and mid-tier institutions have seen similar curves. The default 5% inflation rate in this calculator reflects this long-run trend.

Several structural forces drive tuition above general inflation:

• Baumol’s cost disease. Higher education is labor-intensive and doesn’t benefit much from productivity gains. A lecture still requires a professor and a class; a lab still requires staff and equipment. Wages must keep pace with the broader economy, but productivity doesn’t, so unit costs rise.
• The “amenities arms race.” Universities compete on rankings, research output, and student experience — driving investment in facilities, athletics, administration, and services that don’t directly reduce the cost per credit hour.
• Federal student loan expansion. When students can borrow more, institutions can charge more. Research consistently finds that increases in federal loan limits are partially absorbed into tuition increases — the so-called “Bennett Hypothesis.”
• State funding cuts. Public universities have seen decades of reduced state appropriations per student, shifting a larger share of costs to tuition.

How to save for college — 529 plans explained.

A 529 plan (named for Section 529 of the Internal Revenue Code) is the primary tax-advantaged vehicle for college savings in the United States. Key features:

Tax advantages

Contributions grow tax-free, and withdrawals for qualified education expenses (tuition, fees, room and board, books, required supplies) are also tax-free. Many states additionally offer a state income tax deduction or credit for contributions, effectively giving you an immediate return on top of the tax-free growth.

Example: a California resident contributing $10,000/year to a 529 at a 7% annual return over 10 years accumulates about $138,000 — with all growth untaxed. The same $10,000/year in a taxable brokerage account at 24% federal + 9% state tax on gains would net considerably less.

Contribution limits

There is no annual contribution limit in the IRS code for 529 plans, but contributions are treated as gifts. The annual gift tax exclusion is $18,000 per person (2024), so a couple can contribute $36,000/year without gift tax implications. Additionally, 529 plans allow “superfunding” — a one-time contribution of up to 5× the annual exclusion ($90,000/$180,000 per couple) elected to spread over five years.

What if the child doesn’t go to college?

529 balances can be transferred penalty-free to another family member (sibling, parent, first cousin — the definition is broad). As of 2024, unused 529 funds can also be rolled into a Roth IRA for the beneficiary (up to $35,000 lifetime, subject to the annual Roth IRA contribution limit). Non-qualified withdrawals are subject to income tax plus a 10% penalty on the earnings portion, not the principal.

Investment choices

Most 529 plans offer age-based target-date portfolios that automatically shift from growth (equities) to conservative (bonds/stable value) as the beneficiary approaches college age. For a child with 10+ years until college, an equity-heavy allocation is historically appropriate; within 3 years of college, a more conservative mix reduces the risk of a market downturn wiping out savings right when they’re needed.

Other savings strategies.

Coverdell Education Savings Account (ESA)

Like a 529 but with a lower $2,000/year contribution limit and the ability to use funds for K-12 expenses as well as college. Phases out at higher incomes.

UTMA/UGMA custodial accounts

No contribution limits and no restrictions on how funds are used — but no tax advantage on growth, and the assets become the child’s at majority (18 or 21). Because FAFSA treats student assets at a higher rate (20%) than parent assets (~5.64%), large UTMA balances can meaningfully reduce need-based financial aid.

I Bonds

US Series I savings bonds earn a rate tied to CPI inflation. Interest is exempt from state and local taxes and may be federal-tax-free if used for education expenses (income limits apply). Limited to $10,000/year per Social Security number.

The power of starting early

The monthly savings required to fund a degree drops dramatically with time. Saving for a newborn over 18 years requires roughly one-third the monthly contribution of starting when the child turns 10 — for the same projected total. Compound growth does the heavy lifting when given time.

Disclaimer

This is a planning tool. Actual college costs depend on the specific institution, financial aid received, scholarships, in-state vs. out-of-state status, and living arrangement. Investment returns are not guaranteed. Consult a financial adviser before making significant savings decisions.