A student and parent prepare to move for college

Estimate College Housing Costs to Save With a 529 Plan

Figuring out the future cost of housing can allow families to save for living expenses in a college savings plan.

A student and parent prepare to move for college

Parents paying for college housing expenses with 529 plan savings must stick to a school's listed annual housing allowance in order to avoid tax penalties.


Utah parent Doug Foxley was able to save enough to pay for all four of his children to go to college. But saving for his son Stephen's education required a bit of extra research.

Stephen attended the University of Southern California in Los Angeles for his undergraduate degree in finance. His housing and general living expenses were higher than if he had gone to a school in Utah or another place with a cheaper cost of living. The Foxleys call it the "LA tax." 

To estimate that difference, Foxley asked his friends who sent their children to schools in cities such as Boston and New York what they paid in terms of cost of living. He determined it was 1.5 to 2 times the cost of living of Salt Lake City and saved accordingly.

Stephen also found roommates and lived off campus to save money after staying in a dorm his first year.

[Make sure to budget for college commuting costs.]

Parents saving for a child’s college education in one of the tax-advantaged college investment accounts known as 529 plans can have a hard time estimating how much they’ll need to save. 

Because the cost of off-campus housing doesn't have the same rate of increase as other college costs such as tuition and fees, and because many students don’t live in the dorms past the first year or two, housing costs can be harder to estimate than other expenses, says Jerry Love, a Texas-based certified public accountant and personal financial specialist.

A good estimate for increases in the cost of living is between 3 to 5 percent, Love says. For parents in the same situation as Foxley, they could take current rent in the city of a student's dream college and then estimate it at 3 to 5 percent higher for each year until the student is expected to attend.

The baseline – the estimate of today’s expenses for their student’s expected housing situation – that parents use varies.

Parents who send their children to private, religious or military schools may spend money on dorms and on-campus housing throughout their students’ undergraduate years. For them, a good method of estimation is to adjust current campus housing costs for inflation.

Regardless of how parents estimate housing costs, they have to remember they can’t withdraw more than the cost of a dorm room in any given year from their 529 plan account without the possibility of incurring a tax penalty.

[Learn to set a smart college savings withdrawal strategy.]

"A 529 plan account gives families flexibility on where the beneficiary lives while they attend school,” says Lynne Ward, executive director of the Utah Educational Savings Plan, via email. “Savings can be used for room and board for students who are enrolled at least half-time, whether the student lives on campus, off campus, or at home with their parents, up to the amount the institution budgets for room and board in its stated cost of attendance."

This means if parents are planning on saving more than the dorm costs and all other allowed higher education expenses, they should use a different savings account, not a 529 plan account, in which to put aside the difference, experts say.

Many of Love’s clients send multiple children to Texas Tech. Some families with three or four children attending the same college buy a home in Lubbock and then each child lives in that house when they’re attending the university. 

If the student has other roommates who pay rent, that reduces the cost to the parents, he says. Families have to consider their individual situation and plan based on factors such as the cost of buying, renting or extended dorm room living.

[Understand how to use college savings for multiple children.]

For a family buying a home, the parents should pay for any purchase expenses including the mortgage with non-529 plan savings, Love says. This allows the parents to deduct mortgage interest.

Then, their children can repay them an amount each semester, up to the listed housing allowance by their school. Generally, parents sell the home after all their children have graduated.

All parents, even ones who plan on having their college students live at home, can save money by encouraging teens to take community college courses over the summer during high school and college to speed up graduation, Love says. Graduating faster saves money on all living expenses.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.