To prepare financially for college, you need to start saving early — ideally by the time your child is in grade school or junior high. But how much should you plan on saving each month? Read on to find out what experts say about how much you should save based on your family's circumstances.
"It's hard to pinpoint a savings amount that will apply to every family," says Lynn O'Shaughnessy, author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price. Still, she adds, there are some guidelines you can follow to figure out how much you'll need.
What are the guidelines?
First, you should consider what schools he may attend in four or five years and calculate an estimate based on tuition costs at these schools. These figures usually aren't available until freshman year of high school.
In the meantime, you should aim to set aside enough money to cover tuition at a few local colleges. While your teenager may have his heart set on going to a college in New York, his grades and SAT scores could make him a good candidate for a much cheaper state school in the Midwest.
Second, you need to calculate how much it will cost each year that your child is away from home pursuing higher education. This includes not only tuition but also room and board, books and supplies, clothing and incidentals, travel expenses from home to campus, backup spending money if he does not receive financial aid or scholarship funding, and any special equipment or course fees required by an individual class or program of study.
Those costs can add up. According to the College Board, the average tuition and fees paid by full-time students at four-year colleges this year are $8,244 a year.
What should parents consider?
Tuition fees
When planning how much to save, don't forget that costs could go up faster than you expect. "Parents need to watch the (college) sticker prices," says Madeline McDowell, founder of Savingforcollege.com and co-author of The Scholarship Handbook: A Guide for High School and College Students. "Students should plan on covering tuition and fees at a minimum — but know that they can always cover room and board while they're in school," she adds.
Family income
Don't start saving for college if you don't have the financial means to do so. In general, your savings amount will be, at least somewhat, tied to your family's income level. If you earn around $30,000 a year or less, you may want to limit your savings to the amount it takes to pay for tuition at a local college.
However, if you make around $50,000 or more annually, try to save enough money each month that your child can attend any four-year institution of higher learning you choose and still have some spending money left over. It's not necessary to cover all living expenses while he is away at school — just be sure he has what he needs for his first year there before you stop saving altogether.
Even if your income falls somewhere in between these two extremes — say $35,000 a year — you need to do as much as possible toward covering tuition costs as far ahead as you can afford.
Transportation
Calculate what transportation costs will be after your child arrives on campus for freshman year. Will he ride the bus or train to class, and how much will this cost? Will he need a car on campus? How much are the costs associated with owning and maintaining a vehicle? These expenses can add up quickly.
Living expenses
If your child gets no financial aid or scholarship money, he should plan on having $2,500 to $7,000 spending money per semester while he is away at school. If he plans on attending graduate school after his bachelor's degree, adjust this total upward accordingly.
Remember that you also need money for books and supplies, laundry/clothing expenses (including special uniforms required for certain programs), food costs, and miscellaneous items during the school year. Add these up so you can calculate how much it will cost each month once your student heads off to college.
Life skills
Consider how student life is financially different from adult life. Many students rely on their parents for spending money, food, housing, medical care, and cell phone service. If your child returns home after college every school break, will he be able to handle his own finances in terms of paying bills and budgeting? Will you have to continue covering some or all of these costs yourself even when he is away at school?
Books
Don`t forget about prices for books and supplies. For example, the average student at a public university spends $1,152 per year on books and supplies alone, according to The College Board`s Trends in Higher Education.
Further education
If your child takes time off between high school and college to work or travel or changes career direction after graduating, will you still be responsible for college costs even though he is no longer a full-time student?
Remember that your child's college savings goal isn't the only financial responsibility you have. Consider how much you're going to need to save for retirement, emergency funds, and other long-term goals in addition to college tuition.
Free money
It's always better to save up your own money, but there are two common ways for parents and students to get free cash toward paying for school: scholarships and grants. Scholarship amounts typically range from $750-$10,000 per academic year; grant amounts can be around $500-$5,000.
Scholarships are based on merit, while grants are typically based on financial need. If your child is lucky enough to win multiple scholarships or is awarded more than one grant, he may not have to use any of his own saved-up college tuition money. However, if he does end up using some or all of his savings after winning college financial aid, there's no shame in this — it happens to the best savers!
There are also "free" scholarship search sites that can help you find free money for school. Some offer full scholarships to cover the whole cost of an education at certain schools, but require students to pay back a percentage after graduation; other sites simply give away small amounts of money toward tuition costs.
How to save more?
Here are nine basic steps for earning more money to fund your child's college education:
- Contribute additional funds during periods of high stock market activity. For example, if the stock market is fluctuating wildly (dropping at times but rising quickly), consider putting all or part of your contributions into cash or fixed-income investments. This will help reduce risk while also providing some protection against future losses. But make sure not to keep your savings locked away, as you'll need liquidity to make withdrawals at a future time.
- Take advantage of catch-up contributions. If you're over the age of 50, you can contribute an additional $1,000 to your account in most states. This is technically called a "catch-up contribution," but really it's just extra money that may be earmarked for your child's college tuition. If it helps put your mind at ease about funding college costs, consider this free contribution when planning out your annual budget!
- Try tax-advantaged investments. These are investments that have been structured so that some or all of the return on investment is not taxed as income in the year earned (the interest and dividends from these investments aren't even reported on your state income tax return). Several federal, state, and local governments offer these types of programs to residents.
- Simplify your savings strategy. If you're saving for several major expenses (including college tuition, weddings, down payments on first homes), consider creating a "family pot" where you can combine various amounts to save toward one big goal. This is typically done using certificates of deposit or investment plans at your bank or credit union.
For example, if you have $5,000 saved for your eldest daughter's wedding and another $1,500 saved for your younger daughter's college tuition down payment, open up an account titled "Family Pot" with this money inside it. Then set aside another amount each month until the total equals $20,000 (for example). Then use this money to fund your child's education. - Consider the possibility of tapping home equity. If you still own or live in your primary residence, you may be able to tap into some of the equity accumulated over years of owning the home by taking out a "home equity loan." The interest rates for these loans are usually lower than other types of consumer debt -- making them an attractive alternative for funding college tuition, weddings, and other expenses that come up each year. However, take care before using this option; it is not without risk.
- Contribute funds every two weeks instead of every month. This is called biweekly payroll deduction, and if your employer allows it you could put away an extra $100 every two weeks by making this small change.
- Get a part-time job. If you need to supplement your current income and increase the number of funds you can save, consider taking on a part-time job. It's one of the most direct ways to give yourself some added flexibility -- both emotionally and financially. Just make sure your new job doesn't conflict with other important things in your life (like seeing your family).
If you currently own a business, it may be possible for you to bring on employees or hire subcontractors to work with you during periods of high demand while keeping the books in order for that person. - Track expenses carefully. Before you start saving for education, make sure you know exactly which expenses will be incurred and when. To do this, find your child's transcript and use it as a tool to help figure out what classes they'll need to take and how much those classes might cost.
Talk with their teachers and counselors about any fees that might be associated with taking certain courses or getting extra help outside of class time (for example, tutoring). You may also want to talk with school financial aid officers about whether there are scholarships available specifically for students from your area who plan on attending schools in the district. - Use 529s as one part of your savings strategy. With these investments accounts, you can directly contribute funds into future college tuition plans without worrying about paying taxes each time you do so. The money in a 529 plan grows tax-deferred and distributions (including earnings) are free from federal income taxes when used to pay college tuition and fees (for kindergarten through graduate school). Just make sure you take out only what you need; otherwise, the remaining funds may be subject to hefty taxes and penalties.
Alternatively, if your child decides not to go into higher education after high school or receives financial aid that makes it possible for them not to need as much outside funding, you can withdraw the funds in your account (and any gains realized therefrom) without owing federal taxes.
However, while some states offer tax breaks on 529 account contributions, others don't. Also keep in mind that if your child decides to go into a field of study requiring more than four years of college, the funds won't last for an entire degree program.
What to do with college savings
When you've reached the point where you have more than one 529 accounts set up (created specifically for your child`s college savings), or you're saving for multiple children's college tuition at once, consider consolidating your accounts into a single investment plan. In other words, roll one child's old savings into his sibling's current account.
When considering this option, always check the fees and expenses of the new plan to make sure they aren't higher than those of your original plans. You can also consolidate by transferring funds from a 529 plan to a custodial 529 plan. The last option is to use a brokerage window to transfer money between 529 plans.
Now that your child is 18 or older, open up an account in his name only. Not only will this allow him to access the money on his own (and spend it as he sees fit), but it may also qualify him for more grants and scholarships. You do not need to be a US citizen or permanent resident.
Once you set up the accounts, all of the paperwork goes straight to the bank -- no government agencies are involved! However, some schools may ask parents to verify what amount they have saved for their student's expenses, so be prepared with bank statements if needed.
Note: When creating your accounts always use your legal first name followed by Junior or Senior depending on which one applies at that time.
Final word
Many students end up with large amounts of debt after college, even after receiving full scholarships. Be sure to research expected salaries for your child`s field of study before saving for their education.