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The magic number for college savings
Joe Hurley * Savingforcollege.com
The day finally arrives when you get to bring your new baby home from the hospital. Maybe you've already given some thought to saving for her college education. If not, you can be sure that one of your friends will remark in a joking sort of way that paying for her college education in 18 years could put you in the poorhouse. So you ask yourself how much you really should be putting away for each month for your newborn's college education.
Can you spare $200 a month?
We explain a bit further on why we think $200 a month is a reasonable savings target for many families serious about building up a college savings fund. In developing this figure, we used our own "World's Simplest College Cost Calculator" available HERE. We encourage you to use this incredibly easy, flexible, and accurate calculator for your own college planning.
Not the 100% solution
Will $200 a month take care of all your newborn's college costs in the future? Not likely. In fact, it may not even be close. But then, you shouldn't try to save for 100% of the published price at an Ivy League school, even when you know in your heart that's where your exceptional child is headed. Let's look at the economic situation for most students at four-year colleges and institutions.
The published price for tuition, fees, room and board at the average 4-year private college for the 2008-09 school year is likely to be somewhere around $34,200 (this assumes costs are up 6% from last year's $32,307 figure as computed by the College Board). If costs continue to rise 6% annually, the four-year sticker price for today's newborn will be about $427,000. If your 529 plan gives you a 6% after-tax return, your $200 a month will eventually provide you with $94,000 in your college savings account, or 22% of the total price.
Admittedly, the savings "gap" is still large: $333,000. But before you start hyperventilating, consider the following reasons you should be feeling pretty good about the situation:
- A study by the College Board found that the "net price" at the average private college in 2006-07 was about $9,000 less than the published price. The difference comes from institutional grants and federal grants and tax benefits. If we adjust the numbers in our calculator we find that your $200 a month now covers 30% of the cost rather than 22%.
- If your child attends the public university in your state, the cost drops further. Four years at the average public university starting in 18 years is projected to cost $180,000 based on the anticipated $14,400 sticker price for the 2008-09 school year, or $141,000 if we use a net price of $11,300 (the College Board reports that students at in-state public institutions receive about $3,100 in grants and tax benefits on average). The projected growth of your $200 a month will be enough to cover 52% (sticker) or 66% (net price) for fours years at your in-state school.
- If you start out contributing $200 a month, you will no doubt be able to increase your contributions in the future as your income goes up. In fact, even if you cannot afford $200 now, you may find it much easier to make up for the shortfall by targeting a certain percentage of your income to college savings and thereby making up the difference in the future.
- The rate of inflation of college costs may be less than 6%, and/or your investment returns may be greater than 6%. If we increase the projected investment returns in your college savings account from 6% to 8% (but keep college costs rising at 6%), your $200 a month now covers 27% (sticker) at the private college (up from 22%), and 65% (sticker) at the in-state public university (up from 52%). Of course we're assuming your investment is in a 529 plan, where you pay no taxes on earnings when the money is used for qualifying expenses.
"But my child is not a newborn"
If your child is older, and you haven't any college savings, you will naturally have to save more each month if you want to be on the same track as the newborn in our example above. Instead of $200 per month, the parents of a 6-year-old are looking at about $250 per month, and the parents of a 12-year-old ought to be putting away at least $350 per month. These amounts will produce approximately the same coverage percentages described above. (You can see why the experts advise that you begin saving when your child is young.)
Chart your own path
Everyone's financial circumstances are different and it is difficult if not impossible to predict what the costs of your child's college education will turn out to be. Choice of college and curriculum, eligibility for financial aid, gifts from grandparents or other relatives, and the ability to snag an academic or athletic scholarship will all be factors. In any set of circumstances you are better off saving something than saving nothing. Use the World's Simplest College Cost Calculator and the other resources on this site to refine your plan.
Joe Hurley is the founder of Savingforcollege.com LLC, and a certified public accountant.
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