College is expensive. Hold on, let’s be honest: College is very expensive. College costs as much as a small mortgage, but without owning a home. Even at in-state public 4-year colleges, the average cost of a bachelor’s degree will soon break into the six figures. And, in 17 years, the most expensive college will cost more than half a million dollars. Yikes!
Saving for college can help you pay for college costs and reduce student loan debt. The more you save, the less you need to borrow. But, how much should you save for college?
Start by taking baby steps
You don’t have to save the full cost of college. If you set your goal to save 100% of your children’s future college costs, you may get sticker shock. The sheer magnitude of the cost of attendance might cause you to give up in dismay.
Instead, set your sights a little lower and break up the college savings goal into baby steps, such as how much you need to save per month instead of one big lump sum. If you start saving from birth, the monthly contribution is about 0.3% of the college savings goal. For every $10,000 in college costs, you need to save only about $25 to $35 per month from the day your baby is born.
The 1/3 Rule
The 1/3 Rule is based on the idea that people rarely pay for a major expense in one big lump sum. Rather, they spread out the costs over time by combining savings and debt with current income. One third of the cost might come from past income (savings), one third from current income and one third from future income (loans).
The one-third ratio provides a rough cut of a split. It is possible that some parents will save more and therefore need to borrow less. Other parents don’t save as much, and may be forced to borrow more or to send their children to less expensive colleges.
Most families plan to save about a third of future college costs for each child. On average, however, families save only about 10% of college costs by the time the child turns age 18, falling short of the goal.
The 3X Rule
Based on historical college cost data, the cost of a college education roughly triples over any 17-year period from birth to college enrollment.
That’s the equivalent of an average college cost inflation rate of 6.6%. Tuition and fees tend to grow faster than the total cost of attendance, which includes room and board. Tuition inflation rates are lower at private non-profit 4-year colleges than at public 4-year colleges, in part because private college costs are higher.
How to set the college savings goal
Since 3 x 1/3 = 1, that suggests that the college savings goal should be equal to the complete cost of a college education the year the baby was born. Saving this amount will yield enough money to cover about a third of the future college costs.
You might not be able to predict the specific college in which your child will enroll 17 years from now, but you might be able to predict the type of college, such as an in-state public 4-year college or a private 4-year college.
The College Board’s annual Trends in College Pricing publication reports an average cost of attendance (tuition, fees, room and board) in 2017-2018 as follows:
- Public 4-Year College (In-State): $20,770
- Public 4-Year College (Out-of-State): $36,420
- Private Non-Profit 4-Year College: $46,950
Assuming that the current inflation rates of 3.1%, 3.2% and 3.5% continue, the complete cost of a college education for this year’s college freshmen will be about $87,000, $153,000 and $198,000.
Monthly contribution amounts
These figures can be converted into equivalent monthly 529 plan contribution amounts, assuming 17 years from birth to matriculation.
For a child born this year, parents should save at least $250 per month for an in-state public 4-year college, $450 per month for an out-of-state public 4-year college and $550 per month for a private non-profit 4-year college, from birth to college enrollment.
Start saving what you can
If you can’t save even $250 per month, start with a less ambitious amount. Most 529 college savings plans will let you set up an automatic investment or payroll deduction with as low as $25 per month.
529 plans have an added advantage. When you save in a 529 plan, your money grows on a tax-free tree, causing it to accumulate quicker. Your state may also offer an additional tax credit or deduction for 529 plan contributions.
Once you get started with saving, you’ll find it easier to increase the amount you save per month. You will quickly get used to having less money in your checking account.
There are also natural opportunities to increase the amount you save. For example, once the baby is potty trained, you can contribute the money you were previously spending on diapers to the baby’s college fund. You can also invest windfalls, such as income tax refunds, inheritances and lottery winnings.
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Benchmarking progress in saving for college
It’s never too late (or too early) to start saving for college, since every dollar you save is a dollar less you’ll have to borrow. But, it is easier to save the sooner you start, since the monthly contributions will be smaller and there’s more time for the earnings to compound.
For example, if you start saving for college when the baby is born, about a third of your college savings goal will come from the earnings. If you wait until the child enters high school, however, less than 10% of the college savings goal will come from earnings and you’ll need to save six times as much per month to reach the save college savings goal.
If you want to check how much you should have saved based on your child’s age, multiply the child’s current age by $3,000 for an in-state public 4-year college, $5,000 for an out-of-state public 4-year college and $7,000 for a private non-profit 4-year college.
Fine-tuning college savings
For a personalized estimate of how much to save for college, use the World's Simplest College Cost Calculator.