How Much Should Parents Save for College?

As a parent, you want to ensure that your children will have the best future that they possibly can. That means setting them up for success and making sure that they’re able to go to college and graduate without worrying about the finances behind it.

Unfortunately, college costs a lot of money. It’s no longer feasible for someone to pay for college through a part-time job while taking on extra hours during the summer. Saving for college before your child has even graduated high school is one way to make sure that they have all the money that they need to succeed.

How Much Should You Save?

Saving for college is tricky business. When it comes time to build a savings account for your child’s future, there are several factors that you need to consider:

• College Tuition and Fees: In many cases, this is the largest expense that you will need to budget for. College tuition goes towards paying for the facilities, faculty, and administrative staff at the school that your child will attend. In recent years, tuition has been anything but cheap. A study by the Department of Education found that the average yearly cost of tuition, fees, and boarding at a four-year college in the 2015-2016 school year was over $26,000 per year. In 2018, the average cost of just tuition and fees was $9,716 per semester. Public schools cost less than private on average, and you can usually save money on tuition by sending your child to an in-state school rather than out-of-state.

• Living Expenses: Unfortunately, it’s not just college tuition and associated fees that are likely to drain the bank. Your student will also need a place to live while they’re attending college, along with money to pay for basic living expenses.

• Textbooks and Other School Supplies: The cost of tuition and fees does not cover the supplies and textbooks that your student is expected to have for their classes. In 2017, the average college student spent $1,200 on textbooks and school supplies over the course of a school year. However, there are ways to save money on college textbooks.

How Much Will College Cost in the Future?

The numbers given above represent the cost of college today. However, the cost of college has been rising in recent years. In 18 years from now, CNBC estimates that the yearly cost of an education at a public university could cost about $54,000 — that’s over $200,000 to complete a four-year degree. However, keep in mind that these figures simply represent projected growth of the cost of college, given the rates at which it is growing today.

How to Save Money for College

Now that we have some rough targets in mind for how much you will need to save to pay for your child to go to college, let’s talk about the tools that are out there that can help you put this money away.

College Savings Plans

There are several college savings plans available with various tax perks that can make saving a little easier.

• 529 College Savings Plan: One of the more popular savings accounts, a 529 savings plan will allow you to make tax-exempt withdrawals for expenses related to your child’s education. In some states, it’s possible to use your 529 savings plan to pay for college credits at existing tuition rates for certain in-state schools years before your child attends college. However, if you do this, you will be more limited in your choice of school. Otherwise, you can also choose to use your 529 account for savings, where it will be invested into money market and mutual funds.

• Coverdell Education Savings Account (ESA): Like the 529 savings plan, ESAs allow their users to make tax-exempt withdrawals towards the cost of an education. However, unlike a 529 savings plan, an ESA allows you to be more self-directed in your investing. You aren’t limited to money market and mutual funds with how you invest your ESA, so it’s possible to let it grow through investments that are riskier, but potentially more lucrative, in the long run.

• Roth IRA: The Roth IRA is traditionally used as a savings account for retirement. What you may not know is that the money from your Roth IRA can also be withdrawn to pay for education expenses without incurring a tax penalty. Just be sure that you’re not spending your entire retirement savings on college tuition.

Investment Accounts

College savings plans are useful because they allow tax-exempt withdrawals to help you pay for your child to go to college. However, these savings plans often have yearly limits on the amount of money that can be deposited, making it more difficult to save big — especially if you’re starting late. If you feel confident in your understanding of investing and the stock market, you can also start an investment account with the intention of applying the funds gained towards your child’s education. However, withdrawals from this account will not be tax-exempt.

Personal Savings Accounts

If you are less confident in your own investing ability, then you can also set aside money into a personal savings account to save for college. The money in this account will grow regularly at whatever interest rate the bank has given you. However, like the investment account, withdrawals towards education expenses will not be tax-exempt.

FAFSA Expected Family Contribution

When it comes time to send your child off to college, you will probably fill out the FAFSA. This is a form that the Department of Education uses to determine how it allocates financial aid, including grants, scholarships, and federal student loans. As part of your FAFSA, you will be asked about your expected family contribution (EFC). Your EFC represents the amount of money that you intend to put towards your child’s education, and it can be influenced by any college savings accounts that you might have.

How Much is Your EFC?

On your FAFSA, your EFC will be determined by several factors, including:

• Your and your spouse’s adjusted gross income for the most recent tax year.
• Expected contribution from savings accounts, personal or college.
• Expected contribution from investments.

As of the 2017-2018 school year, expected contribution from a savings account is taken as 12% of that savings account’s total value.

What if You Haven’t Saved Enough?

No matter how early you start saving for college or how much you put in, there’s always the possibility that it won’t be enough when it comes time to send your child off to school. Even if you haven’t saved enough money, there are still ways to help your child pay for college:

• Parent PLUS Loans: Parent PLUS Loans are federal student loans will go under your name as a parent, unlike many student loans which go directly to the student. However, keep in mind that this means that you are responsible for paying back the loan. Paying back student loans can be done at a lower interest rate with student loan refinancing.

• Private Student Loans: You can help your child to take out a private student loan, funded by a private lender, such as a bank or a credit union, to pay for college. If your child is interested in taking on the debt by him or herself, you may be able to help out by cosigning their student loans.

• Grants and Scholarships: No matter how much you are able to contribute, you should always apply for grants and help your child find scholarships. These are sources of college funding that you don’t have to pay back later, if you can get them.