Saving For College – College Costs & How Much To Save

October 13, 2016 | By Jon Powell, CFP®| Savings

Last week, I asked you to take a hard look at your current financial situation and decide whether or not savings for your child’s college is the best use of your resources. This week our focus is on how much college costs and what it will take to get you there.

Let me forewarn you, these numbers might be scary. The cost of college today and what it’s projected to be in the future, based on historical trends, is significant. However, I want to be clear that the numbers I will be quoting are the all-in, average sticker prices on education.

Net costs for a student may often be lower. It is important that you have an honest discussion with your advisor about your children, your financial situation, and what college funding will mean for you specifically.

Cost of College Today

According to The College Board, the estimated annual budget for college attendance (and staying on campus) in the United States over the 2015-2016 school year averaged $24,061 at in-state public schools, $38,544 for out-of-state public schools, and $47,831 for private schools1.

These figures represent the total cost of college attendance. So, this is accounting for not only tuition, but room and board, books and supplies, transportation, and other miscellaneous expenses.

Now, it is important to realize that these are averages, and specific schools may be higher or lower than these figures. This also does not account for the potential benefits for scholarships, grants, tax credits or deductions, and other forms of aid that may reduce the net cost for a student.

The Effects of Inflation

Those are big numbers, and unfortunately, they’re only getting larger.

Over the past several decades, increases in college expenses, particularly tuition, have outpaced that of general inflation. According to the National Association of Student Financial Aid Administrators, the list-price of tuition at U.S. colleges has risen by roughly 7% per year since the early 1980s. Over this same time, inflation has averaged 3.2%2.

To illustrate the impact of this, let’s project the college costs of a new born that is expected to attend college in 18 years. I will inflate the tuition and fees of college at 7% and the other costs (room and board, books, etc…) at 3.2%. The above listed cost of $24,061 for one year of in-state college attendance balloons to $57,634.

How Much Do I Need to Save?

So, if the first year of school will cost $57,634 (and then more for the second, third, and fourth years), what do you need to be saving today in order to get there? If your child was born today, you would need to be saving $491 per month. If you wait until your child is a six-year-old to begin saving, the monthly amount increases to $648 per month.

I’m sure most readers will find themselves in a slightly different situation than I’ve described above, so use a cost calculator like this one to tweak the numbers. In my examples, I’ve used a college costs increase rate of 5% (to account for the difference in the growth rate of tuition vs. other costs) and a 7% rate of return.

Before you commit to an amount, make sure you can budget for it responsibly. Tossing money sporadically at a goal usually results in falling well-short of what you need. Taking deliberate, measured steps is essential in accomplishing any financial goal.

Understanding Your Children and Sharing the Cost

These numbers might make your stomach drop, but let me try to temper those concerns a bit. This is the sticker price of an in-state university, inflated at historical rates. As I mentioned before, the net cost for a student can be less than this “full-price” amount. There are several considerations you should make before assuming it is on you to bear the full burden of these expenses.

-Be honest with yourself, do you think your child has the potential to earn scholarships? Will they even be able to handle a four-year university?

-Qualifying for financial aid is outside the scope of this article, but you may be able to qualify for grants and breaks on tuition.

-You don’t have to pay for 100% of your kids’ college expenses. Saddling your child with debt is obviously not ideal, but giving them some skin in the game can help teach them financial responsibility, as well as take their education more seriously.

There’s a lot at play when determining how much to save for education. It’s often beneficial to get some third-party advice when making these decisions. Our children are important to us, and that can cloud our judgement.

Next week we will conclude our series on saving for college with tips on where to be saving and strategies for taking advantage of tax benefits available for savers.

1 Source: The College Board, “Average Estimated Undergraduate Budgets 2015-16
2 Source: National Association of Student Financial Aid Administrators, “Myths and Realities about Rising College Tuition

Are You Ready to Speak with a Financial Advisor?

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20 Questions to Ask a Financial Advisor

Don’t make a mistake by working with the wrong financial advisor. Ask the right questions the first time to determine if a financial advisor is right for you.

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