How much to save for college might be one of the biggest concerns parents have regarding their child's future and education. Between tuition rates and cost of books, housing, and transportation, determining a target amount can be difficult.
Like most financial decisions, saving for college requires careful and strategic planning. Inflation and the continual rise of tuition costs are key factors to take into account when outlining a savings plan—as well as the age of your child(ren) when you start saving and how many years until they start college.
On top of that, parents have to keep up with regular living expenses and savings for their own future goals, such as retirement. Seems like a lot, but it's possible to reconcile everything. In this article, we explore ways to determine how much to save for kids’ college, when to start saving, and where to invest the money.
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Understanding how much college costs
According to the Trends in College Pricing 2023 report, published by The College Board, in 2023-24 the sticker tuition and fees for full time students are:
- Public four-year in-state: $11,260
- Public four-year out-of-state: $29,150
- Public two-year in-district: $3,990
- Private nonprofit four-year: $41,540
As the data shows, tuition rates vary depending on the type of school, location, and length of the program, with private college being significantly more expensive than public education. On top of that, there's inflation that tends to increase tuition costs yearly, plus additional education expenses such as books, transportation, and supplies, for example.
So, how much to save for college?
No set amount works for every family. However, a general rule of thumb recommended by experts is to save 10% to 15% of your total family income.
“For example, if you earn $60,000 annually, aiming to save between $500 and $750 per month can be a good starting point,” says Dennis Shirshikov, Professor of finance, accounting, and economics at City University of New York, Head of Growth at Summer.
Another way to come up with a savings goal is following the 1/3 rule, which determines that you should split the costs of a big expense by combining 1/3 from savings, 1/3 from current income, and 1/3 from loans.
For instance, if you plan to spend $150,000 with college, by this rule you should cover $50,000 with savings, $50,000 with loans, and $50,000 with your and/or your child's current income by the time they attend college.
How to come up with a target amount
“Determining how much to save for your child's college education requires a multifaceted approach,” Shirshikov says. He recommends researching the average cost of college tuition, fees, room, and board at institutions your child might attend on reliable websites like College Board.
If your child is too young to say what type of school they'd like to attend and such, consider what you think they'll be interested in the future or what's realistic for your family. Then, factor in potential scholarships, grants, and financial aid you may receive in the future.
Governmental websites like Education Usa and Federal Student Aid are some of the most reliable sources of accurate information on scholarships and financial aid. Next step is to sum everything up and to come up with a college savings plan.
Use technology's help to estimate how much your monthly contribution should be. “Tools like college savings calculators can also help estimate the required savings by considering inflation and the expected rate of return on your investments,” Shirshikov says.
How to account for the inflation's impact
Inflation can take a toll on college savings, making your money significantly lose value throughout the years. “Historically, tuition rates have risen faster than the general inflation rate,” Shirshikov says. “For instance, if the current annual tuition fee is $30,000 and the inflation rate for education costs is 5%, the tuition fee will double in approximately 14 years.”
Besides accounting for inflation when outlining your college savings plan, the key to keeping up with tuition cost increases is to invest the money in a high-yield account instead of keeping it in a regular savings account. “It's essential to use investment vehicles that offer returns that outpace inflation, such as stock-based 529 plans or other growth-oriented investments,” Shirshikov says.
When to start saving for college?
According to Shirshikov, parents should start saving for college as early as possible, “ideally from birth,” he says. Since tuition, fees, and additional education expenses can be costly, an early starting point gets you closer to achieving your savings goals. “The earlier you start, the more time your investments have to grow and benefit from compound interest,” he says.
Where to save and invest the money?
529 college savings plans are the most popular, and highly recommended methods to save for college education, due to their tax benefits. The second most popular option is the Coverdell ESA, which is similar to a 529, but with some key differences. Here's a quick comparison between each:
529 Plan
This is a dedicated college savings plan that allows you to make investments and withdrawals without paying income tax to cover qualified educational expenses (i.e. tuition and fees). Since the money invested will grow tax-free, earnings tend to grow at a faster rate than they would in non tax-advantaged plans.
Other characteristics of a 529 plan:
- The ownership of the funds remains with the account holder
- Its contribution limits are high (the amount is defined by the state)
- Some states offer tax deductions for residents who invest in their plan, but you can opt for investing in a different state
Coverdell ESA
Coverdell Education Savings Accounts, or simply Coverdell ESA, “offer similar benefits [to a 529 plan] but with lower contribution limits,” Shirshikov says. The total yearly contribution limit is $2,000 by beneficiary—so if you have multiple children, each account can receive $2,000 per year. The contributions must be made in cash and the funds can be used to cover a variety of education expenses besides tuition, but only for K-12 children.
Other characteristics of Coverdell ESA:
- It can be used for primary and secondary school, as well as for higher education
- When the account is settled, the beneficiary must be under 18, with the exception of special needs individuals
- Funds must be used by the time the beneficiary reaches age 30, otherwise, withdrawals will be accompanied by fees, taxes, and penalties
Besides the 519 Plan and the Coverdell ESA, there are two other not-so-popular but still solid options to consider: the Custodial Account and the Prepaid Tuition Plan.
Custodial Account
A Custodial Account is held under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), with a beneficiary and a custodian that will make investment decisions in their interest until they legally reach adulthood (usually at 18 or 21 years of age). Its biggest benefit is the possibility of investing in a variety of financial assets, such as stocks, bonds, and mutual funds.
Prepaid Tuition Plan
This is a state-sponsored plan that allows parents to prepay for in-state public college tuition. While it's limited in college options, these plans offer benefits similar to a 529 Plan, with tax free earnings and withdrawals, as long as they're being used to cover education-related expenses. Its biggest benefit for parents is being able to secure their child's education costs with today's rate, purchasing units or credits in a lump sum payment or irregular installments.
FAQs
How much to save for college by age?
There's no set amount to save according to the child's age. Instead, you should calculate possible future college costs, based on which college your child might attend, account for inflation and potential financial aid, and develop a savings plan. Ideally, parents should start building their college savings as soon as their children are born.
How much to save for college per month?
A general rule of thumb is to save 10% to 15% of the family's income—as you earn more, you save more. Developing a budgeting strategy for the family, such as the 50/30/20 rule or the zero-based budget, may help parents get organized and on track with the college savings plan.