Saving money for college has always been an important financial goal for many parents. It is only becoming more important as college tuition continues to skyrocket, and stories of people buried under huge student loan burdens become more common. Before we jump into the nuances of the many different ways to save for college, let’s start with the basics.
How Much To Save For College
I’ve talked before about how hard it is to make a financial plan for retirement because of how many variables there are. You don’t know when you will start retirement, you don’t know how long you will live once you do retire, and you don’t really know how much money you will spend each year during retirement. Add it all up, and any retirement plan is a lot of guesswork.Fortunately, making a financial plan for education comes with a little more certainty to work with. For starters, you have a pretty good idea of when your children will start college. Take the grade they are in now, and count until you get to their senior year. The next year, is the first year of college. Granted, there are always exceptions, and your child may take a year off, but unless they start skipping grades, you know when you’ll need the money.
Next, you have an idea of how long they will be in college. This number is a little more vague. Many students take five years instead of the traditional four. There is also the issue of potential graduate school or professional school. However, as we’ll look at in a minute, getting that four or five years locked down is going to be tricky enough, so let’s start there. After all, if you “over save” you can always use that for more schooling.
Finally, we need to know how much college will cost each year. This is where we have the least certainty in part because different colleges cost different amounts of money, and the cost of university tuition increases every year. As a rough estimate, you can take the current tuition at the college you want to target and then increase it at a rate of 7 percent per year to get a pretty good projection of how much each year will cost.
Calculating the Amount To Save For College
Now that we know the variables, we can calculate how much you need to save to pay for your child’s education.
OK, ready for the math?
For most people, don’t even bother.
Unless you have a lot of disposable income, you are not going to save enough money to pay for a full ride to a four year public university. Instead, you should just focus on saving as much as you can.
Yeah, I used to do very meticulous calculations and reports when I was a financial planner, but the reality is that it takes a LOT of money to pay for a full ride to college. If you have more than one kid, it takes even more. Nine times out of ten, not even couples making $250,000 a year would fully fund the educational part of the financial plan.
Let’s do a couple of examples to demonstrate:
Let’s say your kid is 5 years old, and starts college in 13 years. Now let’s say he is going to a school that costs $25,000 per year today. Let’s say tuition increases at 7 percent per year. Let’s say you do pretty well and earn 8% return on your investments. You’ll need to save $771 per month to pay for four years.
Somewhere like Harvard, of course, takes much more.
If you have two kids you have to save $1450 per month.
Now, let’s look at if you are getting started right away. Same situation as above, but instead, your child was just born. (Congratulations!)
- Now, you’ll have to save $561 per month starting right now.
But, wait, what if you have been meaning to save for college, but you haven’t really gotten around to it yet?
- If your kid is 10 years old, you’ll need to save $929 per month.
- If they’re 15 years old, you’ll need to save $1,569 per month.
If you really want to do some math, here is a calculator you can use. There are dozens (probably hundreds) of them out there on the internet, and they’ll all tell you the same thing, start saving several hundreds of dollars a month, right now. But, the reality is that if you have that kind of disposable income, you probably already have really nice nest egg building up somewhere. Just use a hunk of that money to contribute up the the 529 plan maximum.
Saving for College Mentality
Whether your can save the full amount per month or not, don’t worry about that. The fact is that there are many options for financing college. In addition to whatever money you save, you’ll likely be earning paycheck when the kiddos hit college age as well. Some savings plus some discretionary income will get you closer. Remember the problem with student loans isn’t that people have ANY, it’s that they have too much. So, if you save enough to cover half, or even just one or two years, you are doing a lot to help.
Also, keep in mind this isn’t your last chance to help out. Helping with the down payment on their first home might be just as helpful.
Either way, the key is to get started right away saving as much as you can. If you want to skip ahead to the end, go open up a 529 plan and setup automatic monthly investments. Otherwise, the definitive guide to saving for college continues with the next post.
Avoid the temptation to cannibalize your retirement savings plan to save for school. Unlike college, there are no retirement loans and no retirement grants or scholarships. And, unlike college, when you stop earning income, there really is no way to “make it up” later.