Paying for your child’s education is not like buying a toy or a new car. It’s a different beast. But saving for your child’s college education helps you take control of your family’s financial future. You’re giving your child choices because they’ll be graduating debt-free.
But how much should you save for your kid’s college education? Here’s how to figure out what works for you.
1. Set Your Future College Savings Goal
The bad news is that college costs are expected to double again over the next 10 years. The good news? You don’t have to save for the full cost. Shoot for one-third.
Why? The remaining two-thirds can be filled in by scholarships, financial aid and current income (whether that’s your income or your student’s money from a job or work-study). This is a rule of thumb used by financial advisors across the country. It can also save your sanity by making your savings goal a little more realistic.
Say you’re planning for a child who’s 4 years old today. Your college savings goal should be $60,400 for a public, in-state college; $95,600 for a public, out-of-state college; and $118,900 for a private college.
If these numbers seem daunting, don’t worry. There are ways to break it down into an achievable monthly contribution. But first, here’s a little secret that could cut your monthly contribution in half.
2. Invest Your Savings With A 529 College Savings Plan
Nearly 7 in 10 parents aren’t familiar with a 529 college savings plan.
A 529 college savings plan can help your savings go further. It’s a tax-advantaged investment account that works like a Roth IRA, offering tax-free growth and tax-free withdrawals. And yes, parents can open a 529 plan for their child’s college savings. It’s not just for grandparents!
Most 529 plans also offer a passively invested, age-adjusting portfolio option that starts with higher growth investments (e.g., stocks) and becomes more conservative as your child approaches college. This means your money grows over time, but you’re also reducing risk as it becomes time to pay for college.
What difference do these tax savings and investment gains make? If you have a 4-year-old child targeting a private university, your monthly savings goal might be $700/month using a savings account versus $400/month with a 529 college savings plan. That’s a big difference!
There are a lot of 529 plan options, but investing doesn’t have to be complicated. Get started by:
- Comparing the fees and investment portfolio options. Look for a low-fee plan (usually offered directly by a state) with age-adjusting portfolio options.
- Checking if your state offers an income tax deduction for using its plan. If so, take advantage. But remember, you can have multiple 529s, especially if you want to use a better plan for contributions beyond your state’s deductible amount.
- Making sure it’s easy for you (and your family) to use. If you want to get the grandparents involved, make it easy for them!
3. Commit to a Monthly Contribution
But how much should you be saving right now? Let’s assume you are shooting for one-third of the projected cost of college, and you’re using a 529 college savings plan to invest your savings and gain its tax advantages over time. If you’re saving for a 4-year-old child, here are your estimated monthly contributions.
- Public (in-state): estimated $210/month
- Public (out-of-state): estimated $330/month
- Private: estimated $415/month
Remember, these numbers only work if you start investing early with a 529 college savings plan. This way, you will benefit from investment gains, plus tax savings on those gains. Is this achievable for you? If so, great! If not, keep reading.
4. Adjust for Your Personal Situation
The best monthly savings goal is the one you’ll stick to, so choose one that fits your budget. For many families, this is about 10 percent of discretionary income.
Beyond that, ask yourself: Who are the important people in my child’s life? Most likely, many of them would love to help, and there are many occasions when they can: birthday parties, holidays, early school graduations, and other personal milestones.
Ask relatives to swap out a gift for a birthday or holiday and give a small contribution to college instead. Your child won’t know the difference — and let’s be honest, they probably have too many toys as it is.
SUBSCRIBE: Get more advice on saving for college and how it all impacts your future along with other financial know-how with the HerMoney newsletter. Subscribe for free and get it to your inbox every week!