Get Aggressive about College Savings

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Brian O'Connell

By Brian O'Connell

October 26, 2020


If you think the price of college is astronomical today, wait to you hear about the cost of a college education 20 years from now. To ensure that you can afford to pay for a top college tomorrow, you need to get aggressive about college savings today.

Sticker Shock

Here’s the present situation. According to the College Board’s annual report, Trends in College Pricing, the annual cost of tuition, fees, room and board in 2020-21 was $50,770 at a 4-year private non-profit college, a 1.8% increase over the previous year. In recent years, college costs have been increasing by about 3% to 4% per year. 

Now, consider the future cost of college. If college costs continue to increase at about 3.2% , the sticker price for a four-year private college will be more than $350,000 in 2038. If a family aims to land an Ivy League education for their child, the cost for a four-year stay at a Yale or a Harvard could crest $500,000, based on a $75,000 per-year cost today.

For parents with a new-born baby, or for any parents with young children with college savings in mind, those numbers can be understandingly staggering.

How to Make College Savings More Manageable

The trick to make saving for college more manageable is to set a goal, and take small baby steps on a regular basis to reach your college savings goal. Periodically check your college savings progress and get more aggressive if it looks like you won’t reach your goal.

Here’s an action plan to help you do just that:

Take a Monthly View

Instead of worrying about a total cost of college 17 years from now, deal with that cost in small bites. For example, if you save diligently every month for those years year’s (or 204 months), you only need to sock away 0.3% of your total college savings goal.

Or, break it down this way. For every $10,000 you need to save for college you only need to save about $30 per month, for each month of those 17 years. In other words, just $1 saved per day should yield a sizable amount of money to pay for college 17 years from now.

Use the One-Third Rule

Unless you’re a corporate titan or top-level professional athlete, paying for college is rarely a one-time, lump sum payment. Instead, it’s a marathon of sorts, a process that, spread out over time with regular savings, will lead to a successful college savings experience.

In that regard, it’s helpful to view your college savings campaign through the prism of the “one-third” rule.

In a word, the one-third rule means that roughly 33% of your college savings will come from savings (with a major boost from the interest earned on those savings), one-third will come from current income, grants, scholarships and tax benefits while the child is enrolled in college, and one-third will come from future income, like college loans.

While a sound strategy at first glance, the one-third rule only works if you save regularly and hold up your end of the bargain by saving one-third of college costs yourself. The data shows that parents, on average, save about 10% of the total cost of college, falling far short of their needed goal.

Stick to the one-third plan and you’ll meet your college savings goals.

Get More Aggressive If Necessary

If you start saving late, don’t save enough each month or the return on investment is too low, you will burden your child with too much student loan debt.

Use a college savings calculator to figure out how much more you need to save each month to eliminate the shortfall.

Get more aggressive with your college savings contributions so you will reach your college savings goal.

Include Your Kids in the Financial Equation

Your college savings campaign should also make your child shares some of the financial responsibility. For example, if your total estimated cost of college is about $500,000, having your child take out $50,000 in college loans is a reasonable target.

Additionally, having your child focus on academic and volunteer work in their teenage years can led directly to scholarships and grants that further boost the family’s ability to pay for college. Having your children work part-time at college doesn’t hurt either.

Aim for a 6% Average Return on Your College Savings Investment

College 529 plans are great for accumulating college savings over the years. Besides offering tax and financial aid benefits, college 529 plans invest in equity-based funds that routinely return 6% on average, or more if recent stock market history is a guide.

For example, if you stash away $500 a month in college savings, after 17 years of doing so, given a 6% return on investment, you’ll have accumulated $177,500 in total college savings.

Get the Grandparents Involved

Having other family members – grandparents are a great example – help with your college campaign can also shore up your total savings.

Grandparents want to leave a legacy for their grandchildren. One way they can do this is by giving the gift of college.

Grandparents can contribute up to $15,000 to each grandchild’s 529 plan ($30,000 if giving as a couple) without incurring gift taxes. Five-year gift-tax averaging, also known as superfunding, lets them give five times as much – $75,000 each or $150,000 as a couple – without incurring gift taxes. A lump sum in excess of the annual gift tax exclusion is treated as though it were given over a five-year period. This is a useful estate-planning tool.


Get Creative with Your College Savings Plan

Saving for college is a different beast than other long-term savings campaigns, like saving for retirement or for long-term medical care, in that it’s capped at 17 or 18 years and college savings plans like 529’s have different tax and savings factors than other savings plans.

That said, there are similarities, too. For example, your goals are the same – you pick a target total savings figure and work toward reaching that figure, factoring in inflation rates. You also use exchange-traded funds (ETFs) and mutual funds to save for college, just like you would with an employer-based 401k retirement savings plan.

Taking money wherever you can get it – like a child’s birthday cash or from any raises or bonuses earned in the workplace, should a be a major plan component, too.

The idea is to tackle the college savings issue as early as possible, save regularly (i.e., monthly), make saving automatic and use every financial resource you can to meet to your long-term college savings goals.

Do all that and you’ll hit your college savings goals, even its $500,000 to send your child to an Ivy League college in 2036.

[Editor’s note: First published on April 10, 2019. Updated on October 26, 2020.]

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