Knowing how much to save for college is a big question for many families. After a home, a college education may be the most expensive most families ever buy. And unlike home prices, which rise and fall with the economy, the cost of a college degree seems to go in just one direction—up.

As a result, saving enough for college may seem like a hopeless task, and taking on a ton of student loan debt an inevitable curse. But by planning ahead and being realistic, it’s possible to save enough to defray a significant portion of the bill. The first step is to understand what college actually costs—and what it’s likely to cost you personally.

The True Cost of College 

The federal government requires that all U.S. colleges and universities publish their annual cost of attendance (COA). The COA includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. If you already have a list of colleges in mind, knowing their COAs can give you some idea of how their costs compare.

But it’s important to note that a college’s official cost of attendance is like the suggested retail price of a product that’s frequently sold at a discount or like the sticker price on a new car. The reality is that many students and parents pay considerably less.

What’s more useful to know is the college’s net price, after taking into account any grants and scholarships for which the student may be eligible. While student loans are also touted as “financial aid,” unlike grants and scholarships, they eventually have to be paid back with interest. Rather than reducing your cost, student loans increase it in the long run.

The College Board’s annual “Trends in College Pricing” report shows the stunning difference between what many colleges say they charge and what they actually charge. For the 2019-2020 school year, for example, the average “published” tuition, fees, and room and board at four-year public and private colleges looked like this:

• Public four-year (in-state): $21,950
• Private nonprofit four-year: $49,870

But the average net prices, after accounting for grant aid and tax benefits, looked like this:

• Public four-year (in-state): $15,380
• Private nonprofit four-year: $27,370

Much better, right?

Figuring Your Own Cost

Your net price will depend mainly on your family income. When it comes time to start applying to colleges, you’ll want to fill out the U.S. Department of Education’s Free Application for Federal Student Aid (FAFSA). The FAFSA is used to determine your eligibility for federal aid as well as to apply for it. If you aren’t at that stage yet, the department also has an online tool called the FAFSA4caster that you can use to see how much federal aid you might expect.

If it appears that you’re eligible for federal aid, the department’s College Scorecard provides average annual cost data for specific colleges and universities, based on each school’s COA minus average grants and scholarships for federal financial aid recipients. If you aren’t eligible for federal aid, your net cost will be closer to the school’s COA.

Even if you don’t receive federal aid, you may not have to pay the college’s full, published cost. Another important cost factor is the college itself. In a classic illustration of supply and demand, schools that can afford to turn away large numbers of applicants are less likely to discount their tuition than those that are struggling to keep their lecture halls full.

Many colleges use so-called “merit” aid as a way to reduce students’ tuition costs and compete with schools that can get away with charging more. And once a student has been accepted by one or more schools, it can be worth a call to their financial aid offices to ask if they can do any better.

If college is coming up in a year or two, it’s relatively easy to multiply your likely net cost by four (assuming the student plans to graduate in four years). Because college costs rise each year, you’ll also want to build in some additional money to account for inflation. Fortunately, according to The College Board, college cost inflation, which once outpaced the consumer price index (CPI) by several percentage points, has slowed somewhat. The costs at in-state public universities for 2019-2020, for example, were up an average of 2.6% from the previous year, while private college costs rose 3.3%.

So, as a simple example, suppose you plan to attend your state university starting next year. Going by current prices and college inflation rates, your freshman year might have a net cost of about $15,780, the following year $16,190, and so forth. Four years would run a total of roughly $65,625. A private college would most likely cost a lot more than that, but the math is the same.

Any number you arrive at will be a guess, of course, and the farther off college is, the more of a guess it will be. But at least it’s an educated guess.

Other Cost Considerations

A number of factors can reduce college costs. An employer might cover some of the bill as an employee benefit. The student could win an athletic or other scholarship. Or they might be able to commute from home, reducing room and board costs.

But other variables that can raise the price tag—in particular, if the student takes more than four years to graduate, as many students now do.

If you can confidently predict that any of these things will happen, raise or lower your cost estimates accordingly.

Once you have an idea of what college is likely to cost, that can be your savings target. If it’s unrealistic to try to save the entire amount—and for many people, it is, given all the competing demands on our budgets—you can set your sights on saving a portion of it. The more you can pay, the less you’ll have to borrow and eventually repay.

Where to Save for College

For many people, the easiest and most convenient way to put money aside for college is through a state-administered 529 college savings plan, also known as a qualified tuition program. The money you deposit in a 529 college savings plan grows free from federal income tax, and your withdrawals are also tax-free as long as you use them for qualified higher education expenses, such as tuition and room and board.

Another type of 529, a prepaid tuition program, covers tuition but usually not room and board. Many states also provide for tax-deferred growth and tax-free withdrawals, as well as allowing a state tax deduction for the money you contribute, up to certain limits.

There are no limits on how much money you can add to a 529 plan each year, although many states do set limits on total contributions. Recently those ranged from $235,000 to over $500,000—which, for people who can afford to save that much, could be ample to cover just about any four-year degree.

What if You Save Too Much?

Because 529 contributions can only be used for qualified educational expenses, you might wonder what would happen if you don’t need that money, or all of it, to pay the bills. Say the student gets a free ride and ends up paying zero tuition, or decides not to attend college at all.

Having too much money saved for college is a problem that few families will ever face. But if it happens, there are ways to deal with it. For one thing, the owner of the account can change the beneficiary to another qualifying family member, such as a sibling, a niece, a grandchild, or even the person who opened the account. In addition, under the SECURE Act, passed and signed into law in Dec. 2019, a beneficiary can take out a lifetime maximum of $10,000 from a 529 to pay student debt.

If all else fails, it’s possible to simply withdraw the money, although the account owner will owe income taxes on the earnings plus a 10% tax penalty. There are exceptions to the penalty, so be sure to check with your tax accountant before withdrawing funds.

Bottom Line

Knowing how much to save for college is a challenge for families. Still, those who start early with setting savings goals and putting a savings plan into action will be in the best position when the time comes to begin paying. And remember that a gap usually exists between a school’s published prices and what many students actually pay after financial aid and other reductions.