The ever-rising cost of college is common knowledge. Depending on the school a student chooses, the cost of tuition, room, and board for an undergraduate degree can easily exceed six figures. With costs so high, many parents are simply overwhelmed. Saving enough to cover all of a child’s college education expenses may seem like an impossible goal, so many parents don’t get started. Or if they do save, they don’t save enough.
If you want to help your children pay for college cost, you need a clear savings strategy. Below are some simple guidelines for determining how much you really need to save.
Estimate How Much College Will Cost
According to data from the College Board, a year of tuition, room and board at a public institution costs $18,943 in the 2014-2015 academic year and $42,419 at a private, non-profit institution. Assuming future increases of 3% annually, that means in 18 years, a year of college will cost more than $32,000 at a public school and roughly $72,000 at a private school.
Those estimates are staggering; of course, it’s possible that college costs will level off or increases won’t be quite so steep. But in any case, the young children of today will certainly face much higher college costs than students do currently.
Why does all this matter? Because you need to get a sense of what it might actually cost for your child to attend college. If you have a baby who was born this year and hope to send him/her to a private four-year college, you’d need to save about $288,000 to cover all the costs.
Decide How Much You Want to Save
Once you have an idea of how much your children’s college might cost, you can set realistic savings targets. Say you want to be able to cover 80% of the cost at a four-year, private college for your child, with the expectation that your child will either obtain grants or scholarships or take out loans to pay the remaining portion. That means a savings goal of $230,400 at the end of 18 years. To hit that target, you’d need to set aside about $595 a month, assuming annual returns of 6%.
If your initial savings estimates are high, consider tweaking your goals. Meeting 80% of your child’s estimated college costs may be unreachable, but 70% may be a more achievable goal. Also, consider whether there are other sources you can tap to boost your savings. Grandparents may be willing to make contributions to a child’s college fund. Monetary gifts your child receives for birthdays and other milestones can be added to a college fund. Finally, don’t count out the possibility of financial aid – in the 2011-12 school year, 85% of first-time undergraduates obtained some amount of financial aid, according to the National Center for Education Statistics.
Create a Plan
The estimates above are just that – estimates. Unfortunately, many parents have little idea how to get started saving. Placing funds in a low-interest savings account reduces risk, but means you’ll have to save more. A 529 college savings plan, which offers tax advantages and access to investments, could be a better way to reach your goals.
To create your own college savings plan, you’ll need to think carefully about your family and your situation. Please call if you’d like to discuss this topic in more detail.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.