How Much to Save for College
Let’s face it: for the vast majority of Americans, college is exceedingly expensive. According to the National Center for Education Statistics, the cost of an undergraduate education rose by 497% between 1985 and 2017– more than twice the rate of inflation. As you plan how much to save for your child’s college education, it’s important to remember that costs are much higher than they have ever been.
These higher costs make it all the more important to start saving for college as early as possible. It is also important to make a financial plan to determine how much debt you or your child are willing to take on to obtain that degree. Don’t worry about saving enough to pay for your child’s entire education; the truth is, very few families can afford the entire cost of a college education. But how much should you save?
Set incremental goals
The full price of a college education can seem overwhelming, but don’t let that interfere with your goal-setting. Start by setting a conservative monthly goal, putting aside whatever you can spare from your paycheck. Reassess how much you can afford to save every year or so. Hopefully, as you begin to earn more money, you can afford to set more aside.
Even a small monthly contribution can make a big difference. Try setting aside $30 per month and scale up from there, as best you can. If you start saving when your child is born, these amounts will compound with interest to pay off a significant amount of your child’s education. And don’t limit yourself to these incremental goals
If you get a bonus or some other unexpected sum of money, consider setting aside a portion of it, or the whole thing, to save for your child’s college.
Also read: How to save money in college
Where to save your money
One of the best places to put the money you save for your child’s college education is a 529 savings plan. When used for educational expenses, funds from 529 plans are exempt from federal taxes, including the interest accumulated while they sit in the account. In some parts of the country, they are even exempt from state tax. This is a huge tax benefit to help you pay for your child’s education.
If a 529 plan isn’t a good fit for you, savings bonds might be another good way to store your college savings. Some savings bonds qualify for similar tax benefits to 529 plans, and they are low-risk investments.
Consider all your costs
When you are determining how much to save for your child’s education, make sure to include costs other than tuition. Room and board, textbooks, registration fees, and test fees all add up. Of course, these can all vary depending on where your child attends school. The College Board found that room and board typically range from $9,000 to $13,000 per year in 2020. If you take these costs into account beforehand, you will not be caught unprepared once the time comes to start college.
See also: How to pay for housing
Rules of thumb
The amount you should save for your child’s education will vary widely based on your situation, but there are a few rules of thumb that you can consult to get an idea of how much you should save. Here are a few of the models and descriptions of how to use them.
The 2K Rule
The 2K Rule is simple: save $2,000 for each year of the child’s life. If you do this progressively from the time they are born and keep it in savings bonds or a 529 account, it will compound significant interest, totaling around $50,000. If you start this plan now, you may want to increase this yearly number if we experience a significant increase in inflation.
The ⅓ Rule
Under the ⅓ Rule, families pay ⅓ of college expenses from savings, ⅓ from their income as they are putting their child through school, and ⅓ from loans. So, under this rule, families plan to save ⅓ of their child’s education costs by the time they are college-aged. Many families cannot reach this goal; if it seems impossible in your current financial situation, you are not alone. Students often have to take out more loans or rely on scholarships to finance their education.
Net Price Calculator
The Net Price Calculator is a free tool that estimates the cost of college according to your family’s financial situation. Per federal mandate, every college in the US should have a Net Price Calculator on their website. While the NPC is just providing estimates, they tend to be pretty accurate for most families. This is a great next step to see what the actual cost of college attendance would be for your family!
Remember, Nothing is Concrete
Although these rules can be helpful in your financial planning, it’s important to remember that none of the rules are set in stone. Things seldom go as planned, and it’s a good idea to reassess your financial situation frequently. Changes in income, your other educational expenses, and in the cost of college should all be considered
Even with the best of planning, it’s impossible to predict what may happen. Even if your financial situation seems difficult, a single scholarship offer could make all the difference in financing your child’s education. Be sure to explore scholarship opportunities to help complement your savings. You can try our scholarship search tool to help match you with opportunities; there are many scholarships for students who are still in high school!
Related: The best student credit cards