How Much to Save for College

How Much to Save for College

How much should we be saving for college is a question many parents ask. After saving for retirement, this is often the second goal on their list. The numbers below provide an estimate for parents saving for college.

Current Cost of College

The first step is having an idea of how much the cost will be. I suggest looking at two numbers – the cost of public schools in your state and the average cost of private schools.

Below is the 2014-15 average student budget for both an in-state public college and a private college. These numbers include tuition, room and board, books and supplies, transportation, and personal expenses:

Public College In-State

Private College

Room & Board

$9,804

$11,188

Tuition & Fees

$9,139

$31,231

Books & Supplies & Other Expenses

$4,467

$3,853

TOTAL

$23,410

$46,272

Source: The College Board, Trends in College Pricing 2014

Future Costs

According to The College Board, the increase in tuition for 2014-15 was lower than average this year.  Tuition increased by 2.9% for in-state students at public 4-year schools and 3.7% at private nonprofit 4-year institutions.

This year’s increases are still higher than the Consumer Price Index (2%), but are lower than the average increases for the last 10 years.

This is great news for parents estimating the future cost of college.  Even a 1% difference in college inflation can make a noticeable difference in the final cost of college  

For example, the total cost for a child born in 2015 and starting a public college in 2033 using a 5% inflation rate is estimated to be $242,828. If college inflation turns out to be only 4%, the total estimated cost is $201,386.

Savings Per Year

Let’s say a parent plans on paying the entire bill for college and starts saving the year the child is born. How much would they need to save each year? The amount below shows the amount you’ll need to save per year, per month, or as a lump sum the year the child is born.

The first row is for savings in a 529 plan where the earnings grow tax-deferred and the second is for savings in a taxable account. The numbers assume a 6% return on investments and 5% annual increase in college costs.

Public College In-State

Private College

Annual

Monthly

Lump Sum

Annual

Monthly

Lump Sum

529 Plan

$6,581

$548

$77,841

$13,009

$1,084

$153,861

Taxable Account

$7,549

$629

$97,187

$14,921

$1,243

$192,099

Save for Retirement First

In reality, today’s parents are also saving for retirement, current child care costs and other goals and expenses.

Putting away enough to pay for the whole tuition and expenses in often not feasible. So what portion should a parent plan to save for?

The first priority is saving for retirement. You’ll want to be secure in your own future before saving for your child’s education. Even if you save nothing for college but have solid retirement savings, you’ll more easily be able to help you child as they get closer to going to college.

Save One Third the Cost

Once a parent has a saving plan for retirement, they can turn to saving for college. Aim to save at least one third of college costs. In the example above, this means saving $183 per month in a 529 account for a public college and $361 per month for a private school.

Then plan on paying one third of the remaining cost with current income while the child is in college and the last third of the cost from grants and loans that either you or your child take out.

This is just a general framework to start thinking about how to save for college. The numbers will be different for each family depending how much they can save now, how much they can afford later, and the availability of financial aid.

How Much Debt

Students coming out of school with large amounts of debt can fall behind financially. They may end up saving less for retirement or other goals like purchasing a home.

It still makes sense financially for most kids to get a college education, but it is also financially important to keep the amount of debt under control.

So how much is the right amount of debt for a student? One rule of thumb is that the total amount of college debt should not be greater than their expected starting gross salary.

This rule will generally allow the student to pay back the loan in 10 years with a monthly payment between 10 and 15% of their monthly gross income. This is the upper limit; it’s always better to keep debt as low as possible.

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The content on this post is for information purposes only and is not intended to provide individual tax or financial advice. Readers are advised to consult financial or tax professionals for specific information regarding your individual situation. Opinions expressed herein are solely those of Balance Financial Planning, LLC, unless otherwise specifically cited. The content is developed from sources believed to be providing accurate information.

Balance Financial Planning, LLC

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Oakland, CA 94618

cheryl@balancefp.com

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