Saving for College [Part One – How Much Should I Save?]

It’s a good idea to start thinking about college and other expenses for your child(ren) when you become a new parent. Sometimes though, with all the stress and extra expenses and things, we just don’t think about it. So, maybe it’s kindergarten, first grade, or all of a sudden you turn around and your kid is a highschool freshman and you haven’t saved anything to help pay for college for him or her.

Don’t panic. 🙂

Keep in mind that you don’t have to save the entire amount needed to pay for school. There are scholarships, student loans, work study programs, and other ways for your child to help pay for their own education. Also, don’t forget about tax credits such as the Lifetime Learning Credit , the Hope Credit, the American Opportunity Tax Credit, and Student Loan Interest Deductions to name a few. Your employer (or your child’s employer) may also provide tuition assistance.

As soon as you start thinking about sending your child(ren) to college, you should start saving. Even if it’s just $25 a month, that’ll add up over time and, as you get used to saving a little, it often feels easier to ramp up your savings. With my first child, I immediately started putting $25 a month into his college fund. As daycare and diaper costs went down and I got a raise at work, I was able to put a little more away for him every month without missing it because I was already used to not having that money to spend.

Most financial planners recommend that you save for about a third of your child’s college costs, and that you prioritize your retirement savings over college savings for your children. The reason they say to save a third of the costs is because you don’t want to over-save in tax-deferred accounts and end up paying penalties if you take money out later to use it for things other than educational costs. Prioritizing retirement savings over college savings is important because there are a lot more sources for college money than there are for retirement. We’ll discuss retirement savings in another post.

To get an idea about how much college will cost for your child, first let’s look at the current cost of the institution (or an institution similar to the one) you’d like him or her to attend. I’m going to use The University of Texas at Austin, since it’s my alma mater and a state school, (and my kid could technically live at home while attending which would save us a lot of money).

http://bealonghorn.utexas.edu/whyut/basics/finances

If you want to do this math by hand,  we can take the numbers from today and assume about a 7% per year inflation rate. If we estimate that today’s tuition is about $10k/year and that the child we’re saving for is going to college in 10 years, that’s:

  • .07*10000 for year 1 (this year)
  • .07*10700 for year 2 (next year)
  • .07*11449 for year 3, etc.

Keep going until you get the rate of tuition at the time of attendance and for the four years that they’ll potentially be in school. Then you can add the four years (years 11-14) of tuition cost together and come out with your estimated total.

Let’s say that, like me, you don’t want to spend a lot time doing this math. There are also lots of calculators out there that will do the numbers for you. Here’s one: http://www.finaid.org/calculators/costprojector.phtml

This calculator shows that in about 10 years assuming a 7% inflation per year, the cost of four years of tuition at UT will go from about $40k to about $87k (and that’s not counting books, computers, or room and board). In our example we have 10 years to save up, so, for the sake of ease, let’s round the total four-year tuition cost up to $90k. That means we’d need to save about $9000 per year for the next 10 years (or $750/month) if we wanted to save up for the whole estimated tuition amount. Depending on your circumstances, that could be a pretty daunting number. Let’s instead estimate a more manageable goal of a third of the full tuition cost or about $30k, that would mean we’d need to save about $3k/year for 10 years, or about $250/month.

Just remember: there’s no rule saying that you have to save money for your child’s college or how much you have to save. That said, starting with saving something, even if it’s not much at first, is better than not saving anything at all. We should also remember to re-evaluate our savings potential and ability as we go along. Saving can be a dynamic process just like our lives.

In my next post, I’ll go over some of the best ways to save for college.

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