It's hard to leave college debt-free these days. Americans now owe a collective $1.3 trillion in student loans, with the average 2016 graduate racking up over $37,000 in debt. Now there is some good news for today's college hopefuls -- parents are doing a better job of saving for higher education than ever before. In fact, Fidelity Investments reports that 72% of U.S. families are saving for their kids' college costs -- a figure that's climbed 24% since 2007. Not only that, but 41% of families are taking advantage of dedicated college savings plans like 529s, which represents a 62% increase over the past decade. But while these are definitely steps in the right direction, given today's exorbitant higher education costs, most parents still have much catching up to do if they plan to pay for their kids' college degrees in full.


The bar is high

According to the College Savings Plan Network, the average 529 balance climbed just over 3% during the first half of 2016 to almost $21,000 -- a record high. But that amount is just a drop in the bucket given the price of a college education today.

For the 2015-2016 school year, tuition cost:

  • $9,410 on average for a public four-year in-state college.
  • $23,893 for a public four-year out-of-state school.
  • $32,405 for a private nonprofit four-year college. 

And according to the College Board, room and board typically raises these costs by $10,000 or moreannually. What this means is that the average saver using a 529 only has enough to cover a little over a year of in-state college for a student planning to live on campus. Furthermore, it means that the average 529 saver who's amassed an otherwise impressive $21,000 couldn't even cover a year of out-of-state tuition at a public university. But while these numbers might paint a pretty bleak picture initially, if your child is years away from college, you have a good opportunity to catch up and save enough to make more of a dent in those tuition bills.

Save efficiently

One major mistake families make when saving for college is sticking to a regular savings account. While it's a positive sign that over 40% of savers have embraced 529s, it also means that close to 60% have yet to take advantage.

Now there are some drawbacks to saving for college using a 529. Not only do 529s charge fees, but the money you put in can only be used for qualified higher education costs. So if you manage to save more than you end up needing to spend on college, you risk incurring a 10% penalty on your excess savings (though thankfully this penalty only applies to investment gains, not your principal contribution). On the other hand, 529 plans allow your money to grow tax-free, and their returns tend to be considerably higher than those offered by savings accounts.

Let's say you're currently saving $200 a month for college and intend to do so for the next 15 years. If you put that money in a savings account paying 1% interest, you'll have about $38,000 after all is said and done. But if you put that money in a 529 that gives you a 5% return, you'll have $52,000 instead.

Of course, 529s aren't for everyone, but there are other effective college-savings tools out there that offer more opportunity for growth than a standard savings account. You might consider investing via a traditional, non-tax advantaged brokerage account or opening a Roth IRA, which allows penalty-free withdrawals for higher education purposes.

Start early and let those savings grow

One major challenge of saving for college is that you have a limited window to take advantage of compounding, which is the key to helping your balance grow. Assuming you don't start saving until after your first child is born, you have, at most,18 years before you'll conceivably need to use that money. And while 18 years is a decent chunk of time, some of us wait till our kids are older, thus narrowing that window even further.

Let's say you start putting away $300 a month for college when your child is 10. If your investments generate an average annual return of 5%, by the time your child is 18, you'll have about $34,000. But if you start saving that money when your child is just 2, thus doubling your savings horizon, by the time your child reaches 18, you'll have $85,000.

Of course, we can't all start saving for college before our kids are even out of diapers. And we can't all save $200 or $300 a month, either. But if you save as much as you can, as early and efficiently as you can, you stand a greater chance of meeting or coming close to your goals.