Building a College Fund—Smart Ways to Save

Charles Sherry, MSc

Whether you are raising young children or looking ahead as a grandparent, the soaring cost of higher education may already be on the radar.

Even if it isn’t a daily concern, there’s no escaping the reality that earning a four-year degree now requires a significant financial commitment.

Depending on the university, many first-year students are eligible for scholarships that help defray some costs.

Including government sources, over $100 billion in grant and scholarship money is awarded annually, according to the Education Data Initiative, a team of researchers that collects data about the U.S. education system.

• The average scholarship award for public 2-year institutions is worth $4,100.
• On average, first-time undergraduates who receive government grants and scholarships at a 4-year college receive about $15,750 annually.

But even with aid, outlays are formidable.

There is, however, a bit of good news. Tuition inflation has slowed in the 2020s. In fact, it has actually declined, falling at a 3-year average annual rate of 1.90%, according to the Education Data Initiative.

While welcome, that ray of sunshine hardly seems noticeable to students and parents when the college bill lands in the mail.

How bad has it become? The average annual cost of tuition at a public college is 40 times what it was in 1963; after adjusting for inflation, tuition has increased 312%. It is up 37% since 2010.

If you attended a four-year university in the 1970s or 1980s, you are well aware that tuition inflation has far outstripped the general rate of inflation.

So, who does the heavy lifting when it comes to paying for college?

On average, assuming $30,000 per year, parents bear about 40% of the costs, while scholarships and grants cover about 25%. College savings plans and student loans each account for approximately 11% of the total funding mix.

Miscellaneous sources cover the remaining 13%.

An investment in your child’s future

First, let’s review the basics.

Early planning makes a difference. Can you start as soon as your child or grandchild is born? If so, the power of compounding works in your favor.

For example, if you save $250 per month for 18 years and earn 6% annually, your savings will grow to about $97,000 when the child turns 18.

However, waiting until age 9 slashes the balance to just under $35,000 by age 18.

Using the parameters in our example, doubling the period almost triples the balance.

The lesson is simple: take advantage of the power of compounded growth. But let me also stress that even if you didn’t start saving shortly after your child or grandchild was born, that 9-year-old in our example above has resources to help defray costs.

Bridging the divide

A dedicated college savings strategy can expand the resources available to assist your child. Therefore, a critical part of the planning process is to identify ways to bridge the gap.

Let’s review several college savings vehicles that can help close that funding gap.

Before we jump in, I want to caution you that this is a general overview.

Your financial professional would be happy to entertain specific questions and explore how they might assist you in setting up a college savings plan.

With that said, let’s begin.

1. 529 plans

529 plans are tax-advantaged savings plans that are sponsored by states, state agencies, or schools.

Anyone can contribute to a 529 plan.

There are prepaid tuition plans that allow you to buy units or credits at participating colleges or universities for future tuition for the account beneficiary.

You may also consider an education savings plan. This enables you to open an investment account to save for the child’s qualified higher education expenses, tuition and certain expenses for elementary or secondary public, private, or religious schools, and certain other education-related expenses.

One of the primary benefits is tax-free growth within the account, and withdrawals for qualified education expenses are exempt from federal income tax. You may also avoid state income taxes, depending on your state’s rules.

Account owners may withdraw up to $20,000 annually per beneficiary to pay for K–12 tuition and other qualified educational expenses. The amount doubled this year due to the One Big Beautiful Bill Act, though adoption of the higher limits varies per state.

In 2026, individuals can gift up to $19,000 (married couples filing jointly up to $38,000) in a single 529 plan without those funds counting against the lifetime gift tax exemption amount.

Individuals also have the option to “superfund” a 529 plan with up to 5 years’ worth of contributions (or $95,000) in a single year—without triggering federal gift taxes.

Investment options are generally limited and typically shift from aggressive to more conservative as the child nears 18.

Individual states sponsor 529 plans and have varying total account maximums determined by a given state. Maximum amounts are quite large and surpass $500,000 in some states.

529 funds may also be used for professional development and continuing education as well as apprenticeship programs.

2. Coverdell Education Savings Accounts (ESAs)

Like a 529 plan, an ESA allows you to contribute funds into an investment account. And you will have a wider selection of investment options in an ESA versus a 529 plan.

Like a 529 plan, earnings aren’t taxed, and tax-free withdrawals apply to college expenses and elementary and secondary education expenses, regardless of whether the school is public or private, secular, or religious.

But annual contributions are limited to $2,000, and there are income eligibility limits for contributors. The income phase-out is $95,000 to $110,000 for a single taxpayer and $190,000 to $220,000 for a married couple filing jointly.

3. The UGMA/UTMA account.

A child’s account is established by an adult (custodian), is managed by the adult, and any deposit into the UGMA account becomes an irrevocable gift to the child. It may impact financial aid.

There are tax advantages, but not to the extent of a 529 or ESA plan. There isn’t a contribution limit. Just be aware that the IRS will require you to file tax Form 709 for an annual gift above $19,000 ($38,000 for a married couple filing jointly).

Up to $1,350 in earnings from a custodial account in 2026 may be exempt from federal income tax. The next $1,350 of earnings above the exempt amount may be taxed at the child’s tax rate, which is generally lower than the parent’s tax rate. Earnings above $2,700 are taxed at the parent’s rate.

You may also transfer existing stocks, ETFs, mutual funds, or other securities from your account into a custodial account.

Depending on the state, the control of the account must be turned over to the child between 18 and 25 years of age. At that point, the money belongs to them. They are free to spend or save as they see fit.

4. A traditional savings account.

You can open a brokerage account or a traditional savings account in your name and contribute regularly.

It’s under your control, giving you complete flexibility in how the funds are ultimately used. There are no tax advantages, but you may use the funds in any way you see fit to help your child.

5. Roth IRAs

A Roth IRA is an option because contributions can be withdrawn at any time without taxes or penalties. Earnings may be withdrawn penalty-free for qualified higher education expenses. However, consider the impact on retirement planning.

Saving for your child or grandchild’s education starts with a clear plan and the right tools.

Strategies such as 529 college savings plans, tax-advantaged investing, and consistent contributions over time can help you build meaningful education funds by maximizing the growth potential.

As with any project, it’s critical to develop a plan, take the first step, and maintain consistency.

If you’d like more information, would like to develop a plan, or are ready to get started, your financial professional would be happy to assist you.

Chips ahoy

For about three months, the S&P 500 Index has been stuck in a fairly tight trading range.

Yet, beneath the surface, there has been no shortage of market drama. Much of it can be seen in the action of the PHLX Semiconductor Index.

Well known among active traders, the index receives far less attention from long-term investors and is not well known to much of the investing public.

The index has been in existence for over 30 years. It is a modified market-capitalization-weighted index composed primarily of 30 large semiconductor and memory chip makers.

Why do we care? Demand for memory chips used in PCs and smartphones has soared due to massive demand from companies building AI data centers. As a result, chip prices are up.

It doesn’t take an advanced degree to understand that exceptionally strong demand, combined with rising prices, can drive profits sharply higher.

Investors certainly recognize that reality: the index doubled in the second quarter of the year before reaching its peak on June 22, according to data from the Wall Street Journal.

Demand for anything AI-related is off the charts

How off the charts? “The computing power of the total stock of AI chips has grown at 3.4 times per year, doubling every 7 months since 2022, based on revenue data, other financial disclosures, and analyst reports,” according to Epoch AI.

That said, trading in the index has been extremely volatile—both up and down.

Since the 22nd, it’s been mostly to the downside, entering a bear market four weeks after having peaked, i.e., a 20% decline. In total, the index shed nearly 30% before bouncing back at the end of July.

Why the tug of war between buyers and sellers? Investors are skittish about the huge outlays that have driven data-center-related stocks higher.

At its core, the question is whether companies spending hundreds of billions of dollars will earn an adequate return on that investment. As Moody’s recently noted, it is uncertain whether current AI demand is strictly driven by market demand or bolstered, at least in part, by investments from key industry players.

While questions remain about how these firms might meet their profit objectives, it’s hard not to stress that current demand for AI continues to be incredibly robust.

The recent pullback in semiconductor stocks may simply represent a healthy correction, helping to flush out excess optimism and speculative froth. When a trade becomes too crowded, it often reverses as excessive optimism gives way to a more balanced outlook.

But cash exiting semiconductor stocks hasn’t gone to the sidelines.

Instead, it has rotated into other sectors—what would be framed as a broadening in the rally. Groups that underperformed are seeing some support.

While prior winners have come under pressure, the economy continues to expand, and corporate profits are strong.

Key Index Returns
	MTD%	YTD%
Dow Jones Industrial Average	0.32	9.20
NASDAQ Composite	-3.20	9.17
S&P 500 Index	-0.13	9.41
Russell 2000 Index	-3.08	18.11
MSCI World ex-USA*	2.00	9.74
MSCI Emerging Markets*	-3.31	18.62
Bloomberg Barclays U.S. Aggregate Bond TR USD	-1.30	-.069

Source: Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: June 30, 2026–July 31, 2026
YTD returns: December 31, 2025–July 31, 2026
*in US dollars

In summary, I believe investors should avoid placing big bets on narrow sectors.

Stick with what you know best—diversification, patience, and a long-term time horizon.

Success is determined not by timing the market but by time in the market. As the legendary investor Warren Buffett has emphasized, “The stock market is a device for transferring money from the impatient to the patient.”

It beats chasing always-shifting trends and fads.

---

I trust you found this review to be insightful. If you have any questions or simply want to talk through your portfolio or other financial goals, please don’t hesitate to reach out to me or anyone on our team.

Thank you for choosing us as your trusted financial professionals. We deeply value your confidence and are honored to help you navigate your financial journey.

---

---