How Much to Save for Kids College Education

How much money will your child need for a college education?

If you’re wondering what the right answer to this is, you’re not alone. This is a loaded question from not only a financial perspective but also from a values perspective. I paid for my entire college education as I went; it was extremely rewarding.

Having three young children, I have given this subject a lot thought. I’ve come to terms with the fact that I won’t be able to come up with the “right” answer. I can’t see into the future; I don’t know what college will cost decades from now or what type of further education my children will be interested in pursuing. Yes, it would be amazing if they were able to start a business and replicate my experience of being able to pay for their own college, but I don’t feel comfortable going “all in” on that either in case their situation is different. As with most things, I’ve decided the right answer probably lies somewhere in the middle. I don’t want to be on either end of the extremes.

Working as a young adult builds a good foundation for work ethic and time management. When interviewing young adults, I always take time to ask about their work experience during high school and college even if it wasn’t directly related to the position they are applying for. Working in the real world provides important lessons in customer service, navigating relationships with co-workers, reporting to a manager, problem-solving, work ethic and integrity.

In addition to the benefits of working to gain experience and earn income, too much free time during such a transitional time could be a negative. We owe young adults the opportunity to feel organized, productive and accomplished. The reality is that most students have a fair amount of free time available for part-time work during the week and for summers. While it would be more fun to go to the bar Thursday, Friday and Saturday and spend the summers hanging out at the beach, college is a good time to ease into the stressful world of work, budgeting and balancing priorities.

The solution we decided on is paying for tuition while our kids paying for their own living expenses. In our opinion, this seems like the perfect mix of supporting them while still ensuring everyone has skin in the game.

How Much Should I Save?

It’s impossible to predict what college will cost in 15-20 years (our son entering Kindergarten recently got his photo taken with a “Class of 2037” sign, which made us feel a bit old). The cost of college has skyrocketed in recent years, but with technology and people starting to pushback on some of the egregious costs, I am hopeful that this trend will change. The best thing you can do is look at current costs and base your projections off those numbers.

Our goal is to have enough saved for basic tuition costs at a reasonably priced public school. Our kids can work summers and part-time throughout the school year to cover their rent and living expenses. Choosing a school with a good balance of reasonable living expenses and income opportunity for part-time work will be an important lesson in opportunity cost that the kids can explore. I have decided that if my children were going to college today, I would be happy if I had $80,000 set aside. This would cover four years of tuition at most public schools in our area.

How Do I Save?

Open a 529 account and start contributing post-tax funds for tax-free growth. Assuming the $80,000 goal (in today’s dollars), I use an assumption of 3% inflation and an 8% average annual rate of return. In 18 years, the $80,000 goal will actually be $142,447 with 3% inflation taken into consideration. If I put $30,000 into an account today and let it sit, based on these assumptions, I would hit my goal.

If you have an extra $30,000 laying around, this would be an ideal scenario to set it and forget it; if all goes as projected, you’d have the appropriate amount of funds at high school graduation. A more likely route would be to set aside $231/month for the next 18 years. In this example, you’d have saved $49,896 and accumulated compound interest of $92,551.

The best thing you can do is start right away and automate the process. Even if you can’t contribute the ideal amount each month, getting started will give you early momentum; you can always increase your contributions or leverage windfalls such as gift money, tax refunds or bonuses to make large contributions as you’re able.

What If I Save Too Much?

This is an optimistic (but legitimate) question to ask. 529s are specifically geared for higher education expenses. What if you end up with too much money saved due to better than expected market returns, the cost of college being less expensive than you projected or your child doesn’t need the funds because of a different career path or gets a full scholarship for a free ride? Fortunately, you have several options including:

• Cash out funds and pay taxes + a 10% penalty (if your child receives a full scholarship, you apparently don’t have to pay the penalty)
• Rollover the funds to another child or keep them invested for grandchildren or other eligible beneficiaries
• The funds can be rolled into an Roth IRA to give your child a head start on retirement savings

Opening a 529 Account

Here is a listing of several 529 accounts and ratings by Investopedia. We use my529. When selecting a 529 plan, be sure to watch out for fees that will eat away at your returns. There are target date funds that will adjust the investment line-up based on your child’s age or you can choose your own investment line-up.

Running Your Numbers

Use this site from the Office of Financial Readiness to calculate the contributions needed to hit your goal for each child. You can save a report to refer back to later.

This article does not constitute financial advice. I am not a financial advisor or “expert.” Please do your own research.