Keystone Financial Group

How Much Do You Need to Save for College?

There's no denying the benefits of a college education: the ability to compete in today's job market, increased earning power, and expanded horizons. But these advantages come at a price. And yet, year after year, thousands of students graduate from college. So, how do they do it?

Many families finance a college education with help from student loans and other types of financial aid such as grants and work-study, private loans, current income, gifts from grandparents, and other creative cost-cutting measures. But savings are the cornerstone of any successful college financing plan.

College costs keep climbing

It's important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make. According to the College Board, for the 2018/2019 school year, the average cost of one year at a four-year public college for in-state students is $25,890, while the average cost for one year at a four-year private college is $52,500. Many private colleges cost substantially more.

Though no one can predict exactly what college might cost in 5, 10, or 15 years, annual price increases in the range of 3% to 6% would be a reasonable projection based on historical averages.

This chart can give you an idea of what future costs might be, based on the most recent cost data and an average annual college inflation rate of 5%. (Source: College Board, Trends in College Pricing 2018)

Year 4-yr public 4-yr private
2018/2019 $25,890 $52,500
2019/2020 $27,184 $55,125
2020/2021 $28,543 $57,881
2021/2022 $29,970 $60,775
2022/2023 $31,469 $63,814
2023/2024 $33,042 $67,004
2024/2025 $34,695 $70,355
2025/2026 $36,429 $73,872
2026/2027 $38,251 $77,566
2027/2028 $40,163 $81,444

Note: Even though college costs are high, don't worry about saving 100% of the total. Many families save only a portion of the projected costs — a good rule of thumb is 50% — and then use this as a "down payment" on the college tab, similar to the down payment on a home.

What expenses are included in the cost of college?

In the academic world, the cost of college is generally referred to as the cost of attendance (COA). Each college has its own COA. The COA consists of five items:

  • Tuition and fees: These expenses are generally the same for all students.
  • Books and supplies: These expenses can vary depending on the courses selected.
  • Room and board: These expenses can vary depending on where the student lives (e.g., dorm, off-campus apartment, at home) and the meal plan chosen.
  • Transportation: This expense can vary depending on how far the student lives from the college. It can involve daily commuting expenses, three round-trip flights home a year, or anything in between.
  • Personal expenses: This category varies greatly among students. It can include telephone bills, health insurance, late-night pizzas, personal spending money, or even day-care bills.

Twice per year, the federal government recalculates the COA for each college and then adjusts the figures for inflation. The government then uses the COA figures to determine your child's particular financial need come financial aid time.

Why you should start saving early

Next to buying a home, a college education is the largest expenditure most parents will ever make (and perhaps the biggest expenditure when more than one child is in the family picture). Faced with such a daunting task, you might be inclined to ignore the problem and wait until you are more financially settled before you start saving. But that would be a mistake.

The key to sanity in the area of education planning is advance planning. The earlier in the process you become informed about the potential costs and your saving options, the greater chance you will start saving. And the more money you save now, the less money you or your child will need to borrow later.

It is important to begin saving as early as possible so you can earn interest, dividends, and/or capital gains on as much money as possible. With a long-term savings strategy, you can hopefully keep ahead of college inflation.

The more you save now, the better off you'll likely be later. Start with whatever amount you can afford, and add to it over the years with raises, tax refunds, unexpected windfalls, and the like. If you invest regularly over time, you may be surprised at how much you can accumulate in your child's college fund.

Monthly Investment 5 years 10 years 15 years
$100 $6,977 $16,388 $29,082
$300 $20,931 $49,164 $87,246
$500 $34,885 $81,940 $145,409

Table assumes an average after-tax return of 6%. This is a hypothetical example of mathematical principals, is used for illustrative purposes only, and does not reflect the actual performance of any particular investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included. Actual results will vary.

How much do you need to save?

How much you need to save obviously depends on the estimated cost of college at the time your child is ready to attend. Often, these numbers are staggering. For many parents, the question of how much they should save becomes how much they can afford to save.

To determine how much you can afford to save for your child's college each month, you will need to prepare a budget and examine your monthly income and expenses. Don't be discouraged if you can save only a minimal amount at first. The key is to start saving early and consistently, and to add to it whenever you can from raises, bonuses, or unexpected gifts.

Try this Handy Calculator for An Estimate of How Much College Might Cost Your Family...

After you determine how much you can save each month, you will need to choose one or more college saving options. Contact our office for a FREE Strategy Session to discuss the various options that are available and we can help you determine which type of college savings plan would work best for your family.

A final word on financial aid

Many families rely on some form of financial aid to pay for college, which may include loans, grants, scholarships, and work-study. Financial aid can be based on financial need or on merit. To determine financial need, the federal government and colleges look primarily at your family's income, but other factors come into play, including your assets and how many children you'll have in college at the same time.

To get an idea of how much aid your child might be eligible for at a particular college, you can use a net price calculator, which is available on every college website. The bottom line, though, is to beware of too much borrowing. Excessive student loan debt — and parent debt — can negatively affect borrowers for years. The lesson? The more you save now, the less you and your child will need to fund later.

Need help putting together a college plan and figuring out how to pay for it? Contact our office today for a FREE initial strategy session!