One question I often get from new and expectant parents is how much they should be saving each month for their child’s college education. Obviously, if you’re looking at paying for college eighteen years down the road, there are going to be a lot of unknowns: how will college funding change by then? How much will tuition go up? How will parent contribution expectations change?
Even with those kinds of variables, you can still come up with a reasonable college savings plan for your child, even at birth. Here’s exactly how we made the calculations for our own daughter at birth.
First, how much do you want to save?
This is more of a personal question than anything, as different parents have different philosophies and there is no real right or wrong, just different styles.
Some parents believe in a philosophy of no college savings for their child, believing that the lessons learned in paying for one’s own college career are quite valuable. The knock against this is that many students who are put into this position leave college with a tremendous amount of debt.
Other parents believe in a philosophy of paying for all of college – or as much college as possible. Doing this ensures that the child gets into the “real world” with as little burden as possible. Of course, the argument here is that it makes a college education seem much less valuable to the student and has been shown to result in worse grades as well.
Many parents wind up somewhere in the middle, setting a goal of 1/3 or 1/2 of college expenses. For us, we’ve adopted the philosophy of paying for 1/3 of tuition and all textbooks and other educational expenses (like a computer). We want our children to have to work for it, but we also want to take the edge off of their financial burdens.
Action Point #1
Sit down with your spouse and figure out how much of your child’s college education you want to cover. There’s no correct answer for this, only what you feel is right.
Determine a dollar amount
Once you know the percentage of college expenses you want to cover, you’ll need to come up with a target dollar amount. The first step is what college or university would you like your child to attend, realistically? Some families might insist on Ivy League, others might think the local state university is the right choice. For me, I’ll use the school I really wanted to attend (but simply couldn’t afford): MIT.
I discovered that tuition and fees at MIT cost $34,986 for 2007-2008, with a total tuition, room, and board cost of $44,936, but that the average student receives $28,000 in scholarships. That leaves a remaining cost of essentially $17,000 for tuition, room, and board. They also estimate $2,800 for additional college expenses, such as textbooks and supplies and other activities.
Action Point #2
Pick a “target school” and obtain tuition, room, board, fee, and other expense estimates for the most recent year, as well as an estimate of the average scholarship package that a student receives.
Since my wife and I intend to pay 1/3 of the tuition, room, and board and all of the additional college expenses, we would be on the hook for about $8,500 a year in today’s dollars.
But then there’s inflation.
It’s reasonable to expect a 6% annual inflation rate for these expenses. Given that, we should expect to come up with about $25,000 a year for our child’s expenses, totaling $100,000 over the four years they’re in school.
Action Point #3
Calculate the portion of the education you intend to pay for, then adjust that amount for the correct number of years of inflation (6% a year is a reasonable calculation).
What’s the plan to reach that amount?
In essence, to follow our plan, we need to save $100,000 over the next eighteen years. Thankfully, we have mechanisms like 529 plans to save for college without having to worry about taxes, but that’s still a mighty goal.
If I assume an 8% annual return on my investment, I need to put away $215 a month from birth to have $100,000 when the child turns 18.
If I assume only 7% annual return, I need to save $238 a month.
Of course, I can also assume that I will use other methods to help cover this amount. I might plan to use home equity to pay for some of that amount. There may also be other opportunities for assistance – for example, grandparents may wish to contribute to a 529 as well. You might also decide that you’re aiming unrealistically high with your school selection and choose instead to use a lesser school for your estimates. This may move your estimate downwards.
The key is to figure out how much you need to be saving, starting today.
Action Point #4
Estimate how much you need to be saving per month, then start a savings plan (like a 529) and sock that money away.
One key thing to remember, however, is that if you don’t meet your goal, it’s not necessarily the end of the world. Most likely, if you are making an aggressive plan right now, one that assumes strong accomplishment from your child, your child will choose a different path, one that doesn’t require quite as much outlay from you. Even if they meet or even exceed your expectations, you’ll still be able to help them along their way.
The most important thing is to start as young as possible.
If you wait until your children are even eight years old to start saving for that $100,000 goal, you’ll have to save $555 a month to make it with 8% annual returns. If you wait until they’re twelve, you’ll have to save $1,093 a month.
The earlier you start, the easier it will be to help your children with college. If you have young children – or even a child on the way – get started today.