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COLLEGE SAVINGS 101

The magic number for college savings

Updated: 2015-05-13

by Joseph Hurley

The magic number for college savings

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.

You don’t necessarily need a 100% solution

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. A realistic goal for many families is to aim to save 25% of projected college expenses. Of course, this amount will vary depending on the type of school your child plans to (and realistically will be able to) attend.

So what’s the magic number? We used our World’s Simplest College Calculator and data from the College Board to find out:

Private 4-year school
The current published price of tuition, fees, room and board and other costs for the average four-year private college is $46,272 (in other words, the full student “budget”). If costs continue to rise at 4% annually, the four-year sticker price of college for today’s newborn will be about $398,000. Let’s say your goal is to save 25% of this cost by the time your daughter is ready for college. If your 529 plan returns 6% annually, you can reach your goal with monthly contributions of $215.

Public 4-year in-state school
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 $201,386. Using the same 529 plan as in the example above, you would need to make monthly contributions of $109 to meet your goal of covering 25% of the total costs.

Find out if your school qualifies for 529 purposes

Don’t mind the gap

Admittedly, the savings "gap" in both cases is still large: $298,500 for private school and $151,000 for public school. But before you start hyperventilating, consider that for most families these are "worst case" cost projections (except perhaps for those headed to the Ivy League or equivalent). And you may feel that saving for the room and board portion is not appropriate since your child may decide to commute to school, or because much of that cost is incurred whether or not the child is attending college.

Sticker price versus net price

The College Board finds that the "net price" at the average private college in 2014-15 was about $18,870 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 you can cover 25% of the net price with monthly 529 plan contributions of $127 a month. Public four-year schools offered an average of $6,110 in grant aid and tax benefits, which means you could reach your goal of covering 25% by contributing just $80 a month.

The published price for tuition, fees, room and board, and other costs (in other words, the full student "budget") at the average 4-year private college for the 2014-15 school year is likely to be somewhere around $47,000 (this assumes costs go up 5% from the $44,750 figure as computed by the College Board for the 2013-14 school year). If costs continue to rise 5% annually, the four-year sticker price for today's newborn will be about $487,000. If your 529 plan gives you a 5% after-tax return, your $250 a month will eventually provide you with $104,000 in your college savings account, or 21% of the total price.

Admittedly, the savings "gap" is still large: $383,000. But before you start hyperventilating, consider that for most families this is a "worst case" cost projection (except perhaps for those headed to the Ivy League or equivalent). And you may feel that saving for the room and board portion is not appropriate since your child may decide to commute to school, or because much of that cost is incurred whether or not the child is attending college.

2014-15 college costs Total sticker price Net price
Private four-year college $46,272 $27,402
Public in-state four-year college $23,410 $17,300

Increase contributions whenever possible

You will likely be able to increase your contributions in the future as your income goes up. And even if you can’t afford to make the monthly contributions needed to meet your goal right now, you can make up for the shortfall by targeting a certain percentage of your income to college savings and look to make up the difference in the future.

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Assumptions are just that

The rate of inflation of college costs may be less than 4%, 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 4%), $215 a month now covers 32% (sticker) at the private college (up from 25%), and $109 a month covers 32% (sticker) at the in-state public university (up from 25%). 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 private school example above. Instead of $215 per month, the parents of a 6-year-old are looking at about $294 per month, and the parents of a 12-year-old ought to be putting away at least $474 per month. These amounts will produce approximately the same coverage percentage (25%) as 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. For a more in-depth look at how much to save for your family’s specific college needs, and to see if your state offers additional tax benefits for 529 contributions, try our College Savings Planner.

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