How To Determine How Much To Save For College
While we know that the average cost of college is $35,720 per year per student, thats only part of the equation. This number combines the averages for in-state, out-of-state, private, and public universities, which have widely varying costs. It also doesnt factor in inflation or any potential scholarships and grants your child may receive.
Each family is different, with unique circumstances and goals. Below are some different trains of thought. Pick the strategy that seems like the best fit, and then commit to saving for your childs future.
Roth Individual Retirement Accounts
IRAs are usually thought of as retirement savings tools, however, many families use them as potential college savings vehicles as well. Contributions to Roth IRAs can be withdrawn prior to age 59 1/2 for any purpose you choose without tax or penalty. This includes paying for private school, college or any other form of higher education.
With this strategy, you could withdraw some or all of your Roth IRA principal for college and leave the earnings in the account for retirement. With a Roth IRA, you receive no deduction for contributions, but all earnings are tax-free upon withdrawal. Another option is opening a trust in your childs name.
Monthly Contributions For Older Children
So, what if your child isnt a newborn, and you dont have any college savings? There is a simple way to ballpark how much the monthly contribution should increase for a late start in saving for college.
If you havent started saving for college, this chart shows how much youll need to save per month in order to save one third of future college costs at an in-state public college. It assumes 5% tuition inflation and rounds the contributions to the nearest multiple of $10. The Age at Start column shows the age of the child now, assuming that you start saving for their college education now.
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First Figure Out What You’d Like To Cover
With multiple financial goals to juggle, most parents don’t plan to pay 100% of their kids’ college costs. It’s smart to think about how much you plan to pay well before that first tuition bill comes due.
If setting a target seems daunting, here are some helpful ways to think about it.
If you prefer to have your child shoulder some of the load either through working or taking a student loan, explain to them how much you plan to pay and how much you expect them to cover.
Figure out how much schools might expect you to pay
Many schools consider your expected family contribution a formula used to calculate federal financial aidwhen determining your tuition bill.
Plan to cover 100% of certain costs
For example, you might plan to save enough for:
- Tuition only .
- Room and board, books, and fees .
- The first 2 years of college .
Expected family contribution
The amount of money you’ll be expected to pay for college out of pocket, which influences the amount of need-based federal aid you’ll qualify for. It’s mainly based on parent income and assets, student income and assets, the size of your household, and the number of people currently attending college in your household.
How Much You Should Have In Your 529 At Different Ages
Fidelity also has a great free calculator that allows you to determine how much your need specifically for your situation. They leverage many of the same assumptions we do above, and agree that you don’t need to save 100% of your child’s college education expenses. Check out their college savings calculator here.
You might also find this 529 plan contribution limit guide helpful.
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Start Saving When Your Child Is Born
This figure seems scary, but you have to consider the fact your wages will also likely increase at a constant rate to differ some of the excess costs. If you were to start saving the day your child was born, and were planning on paying the $201,108 with an 8% average return on your investments you would need to save $418.90/ month to be able to pay for your childs total college expense. If you were to only receive a 6% return on your investments, you would need to save $519.19/ month for the next 18 years to pay for your childs total college expense.
Education Ira Or Education Savings Account
Education Savings Accounts and Education Savings IRAs allow a maximum investment of $2,000 per child a year, after taxes, for those whose income qualifies. The limit is reduced if a parents modified gross adjusted income is $95,000 . Those who make $110,000 a year are not eligible.
These accounts work especially well for those who start when the child is born, or very young. If the maximum is invested every year until the child goes to college, the amount invested will be $36,000, and the account will have earned more interest than a regular savings account. Withdrawals are tax-free.
Pros of Education IRAs and ESAs:
- The earnings are tax free.
- There are a wider range of eligible uses , than with 529 plans.
- Its a relatively painless way to save money for college long-term.
Cons of Education IRAs and ESAs:
- Those who are above the income limit have a lower yearly cap, or are not eligible.
- Those who are below the income limit still can only contribute $2,000 a year.
- The amount must be used by the beneficiary by age 30.
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Invest In A Mutual Fund
Mutual funds are a good way to invest for long-term savings, and there is no limit to how much can be saved. With thousands of funds available, there are also a lot of options and chances for good return on investment. That said, they come with more cost than some education-specific savings plans do.
Pros of using mutual funds:
- The money is not restricted and can be spent wherever its needed.
- Theres no limit to how much can be invested, and no restrictions on when it can be withdrawn.
- There are more than 10,000 mutual funds available, so finding an option with a high return is good.
Cons of using mutual funds:
- Earnings are subject to annual income taxes.
- Capital gains are taxed when shares are sold.
- If owned by a parent, theyll reduce financial aid eligibility by up to 5.64% of the account value, which grows to 20% if owned by the student.
How To Figure Out What To Save From Each Paycheck
As with most long-term savings plans, it’s good practice to contribute small amounts to a 529 regularly, preferably with each paycheck. Before you calculate how much you need to save from each paycheck, though, you need to figure out your goal amount and that may not be straightforward. You’ll need to think about kind of college education your newborn might want 18 years from now, as well as that future cost.
Using a calculator can help. The one at Saving for College, for instance, projects that the cost of a four-year private college education could end up being about $408,844 for a child born in 2020. Depending on how much you earn, scholarships and grants can lower your goal amount significantly: For example, a family earning $100,000 a year might expect to need around $241,500.
On a per-paycheck basis, that works out to roughly $115, $208, or $254, respectively.
Video by Courtney Stith
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How Much Should You Save For College
One of the most popular ways to look at saving for college is the one-third rule.
This rule dictates that:
- A third of college costs should be covered by past income .
- A third of costs should be covered by income earned while the child is attending college.
- A third of costs should be covered by future income .
The first third is money that you invest as a child grows up. This money will benefit from compound interest and grow over time, as discussed in the previous section.
The middle third takes advantage of the fact that your salary will likely be higher while a child is attending college. Youâll have more disposable income to pay for college during these years than when the child was younger.
For the final third, student loans are used to cover any shortfall that you wonât be able to pay during a childâs education.
How Much Should You Have In A 529 Plan By Age
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The 529 College Savings Plan is one of the best ways to save for college. But most people aren’t taking full advantage of them. And I’m not going to lie – I’m one of them.
So let’s dive in and see how much you should have in a 529 plan.
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When Should You Start Saving For College
As soon as possible! Thats if youve already taken care of Baby Steps 14.
Starting a college fund is a great goal, but its not the only goal. You need to pay off debt, have an emergency fund, and start saving for retirement before you jump into saving for college. There are other ways to pay for college too, like using grants and scholarships. Bottom line, you need to take care of your future first, then you can bless your kids. Its not selfish. Its smart.
If youre following the Baby Steps, you know that saving for college is Baby Step 5. That means there are four other steps you need to take before you even think about Juniors college education:
- Baby Step 1: Save $1,000 for your starter emergency fund.
- Baby Step 2: Pay off all debt using the debt snowball.
- Baby Step 3: Save 36 months of expenses in a fully funded emergency fund.
- Baby Step 4: Invest 15% of your household income in retirement or a Roth IRA).
The True Cost Of College
The federal government requires that all U.S. colleges and universities publish their annual cost of attendance . The COA includes tuition and fees, room and board, books and supplies, transportation, and personal expenses. If you already have a list of colleges in mind, knowing their COAs can give you some idea of how their costs compare.
But its important to note that a colleges official cost of attendance is like the suggested retail price of a product thats frequently sold at a discount or like the sticker price on a new car. The reality is that many students and parents pay considerably less.
Whats more useful to know is the colleges net price, after taking into account any grants and scholarships for which the student may be eligible. While student loans are also touted as financial aid, unlike grants and scholarships, they eventually have to be paid back with interest. Rather than reducing your cost, student loans increase it in the long run.
The College Boards annual Trends in College Pricing report shows the stunning difference between what many colleges say they charge and what they actually charge. For the 2019-2020 school year, for example, the average published tuition, fees, and room and board at four-year public and private colleges looked like this:
- Public four-year : $21,950
- Private nonprofit four-year: $49,870
But the average net prices, after accounting for grant aid and tax benefits, looked like this:
- Public four-year : $15,380
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Recommendations To Help Save For College
Even saving just $100 per month can seem like daunting task. I know it is for me. However, when it comes to saving for college, here are some simple tricks that can help:
1. Save all of your child’s birthday and holiday money. In many families, kids receive money from their grandparents, aunts, uncles, and more. I would estimate that the average kid receives at least $200 per year in gift money. If you saved that, you’re 20% of the way to fulfilling their annual 529 contribution.
A great way to do this is to use a service like College Backer.
2. Look at Upromise. This is a free service that is designed to help families pay for college by simply doing their normal shopping. Upromise offers cash back rewards for linking a credit or debit card and using that card at participating retailers. You can earn anywhere from 1% to 25% back at different retailers. Upromise says that some members are earning at least $1,000 per year – that’s almost everything you need to fully fund a 529 plan. Plus, right now you can get a $25 bonus if you link your 529 plan within 30 days of signing up! UPromise is easy to sign up and save for college – check it out here.
Apply For Federal Student Aid
The Free Application for Federal Student Aid can grant you access to many federal grants, loans, and work-study funds. Plus, most colleges use the FAFSA to determine your eligibility for state and school aid. Submitting correctly filled applications is crucial to get grants, scholarships, and federal student loans.
To begin the process, students must complete the FAFSA application every academic year. You wont need more than half an hour to fill in the necessary information. Then, learn how much you can afford to borrow depending on your financial circumstances. Being rejected in the first year doesnt mean you wont get financial aid next year.
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Where Are Costs Headed
It’s hard to say whatll happen to overall college costs in the future, but they generally increase an average of 8% a year.* Over time, that adds up. That’s why it’s so important to start saving early and make saving a priority.
How much does college cost and how much will it cost in the future?
Calculate an amount based on your target
Our college savings planner makes it easy to see how much you’ll need to save per month to meet the goal you’ve set.
The college savings planner assumes you’ll earn a specific rate of return on your college savings. So once youve determined your asset mix, you may want to come back and adjust your return expectations.
If the planner’s recommended contributions seem high for you, figure out whether you’ll be able to use some of your income to pay for college while your child is attending. If so, you can deduct this amount from what you’ll need to save.
How much does college cost and how much will it cost in the future?
Rate of return
The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
Keep in mind:
Choose The Right Goal For You Then Get Started
When it comes to paying for college, the earlier you begin, the better. But getting started can be overwhelming. The price of college is risingthe cost of college has grown faster than the overall basket of goods and services that people generally buy since 1980and theres a host of other unknowns to plan for. Should you choose a public or private university? Should you stay in-state or go out of state? Could your child get scholarships? What about grad school?
Luckily, you dont need to know the answers to all these questions to start saving. Here are a few of the most helpful strategies for deciding how much to save for college.
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Start Saving When Your Child Is 5 Years Old
Keeping all the same variables in place except for changing the time to college to 13 years , how much would you need per month? Due to the shortened time frame until college, the estimated total cost of college is now $157,574. This is a counterintuitive figure because it is less than the numbers above this is not actually the case. It is just the case because the total cost had less time to inflate, but you also have less time to save! Earning a 8% return on your investment for the next 13 years would leave you to save $577.36/ month. If you were only able to earn 6% on your investment, you would need to save $669.25/ month. For those of us working on a tight budget as it is, the extra hundred dollars a month more of savings by waiting the extra five years may not be attainable.