How Much Do You Need to Save for College?

I listen to a lot of personal finance podcasts and radio programs, probably too much to be honest. One of the most frustrating questions that continues to circulate, without necessarily a good answer, is how much should parents save for the kid’s college education.

I mean we have guidelines for retirement savings (most people recommend save 10-15% to retire at age 65-70 or 25 times your expenses or 8 times your salary depending on who you ask), rules of thumb for buying a house (2-3 times your annual income is one I use), rules of thumb for budgeting (50-30-20 budget, one month ahead with YNAB, as well as others) but I cannot guidelines for how much to save for college.

Part of that probably is that not everyone is going to go to college and everyone shouldn’t. Also, you don’t know what kind of institution you will want to go to, what kind of scholarships or grants your child will get, and a whole host of information. Moreover, with all of the political talk surrounding student loan debt and free college who knows how we will fund America’s university system in the future.

So now that I am a new dad some of my financial thinking has changed. My goals are still to become debt free and financially independent. However, I am no longer just thinking about me, but I am also thinking about our son’s future. Hopefully, when I am dead and buried I will have created generational wealth for him and potential grandchildren and their children’s children in the future.

That idea of generational wealth got me thinking about how to pay for my son’s college education. Because I am an older parent I was initially just thinking I would fully contribute to my Roth IRA and use the proceeds from that to fund his college education. Because by the time he realistically goes to college, if he decides to go to college, I will be 62-63 years old. I could also just continue to work at the university I teach at or go to another university and see if I could get a discounted rate or free tuition for our son. But I am not sure I want to work that long. I am not sure I want to continue to be a college professor until I am 67 just so my kid can get that particular benefit.

Additionally, a colleague of mine gave me a small gift to start a college savings account for him. So after thinking about it for a bit I decided to open a 529 college savings plan for our son.

The question is how much do you put in that plan?

How Much Money Should You Save for College?

As I noted above there are a variety of factors that might play into your decision regarding the 529 plan. Here are some things to check:

1. Depending on your state you might get a tax deduction with your 529 plan. You don’t get any federal savings, but in the state of Massachusetts, where I work, I can get $2000 off my state taxes. And that money will grow tax free.
2. You have to consider if you live in a state that is moving toward free college. In over 20 states there is now some version of free college (e.g. two years at a community college). That can certainly impact how much you will save for your child’s college.
3. You need to consider costs beyond tuition. Most programs that offer free tuition do NOT offer free room and board. That can be an extra 10-15k at a state university. So unless your child is going to stay home then you have to factor that into the cost of college savings.
4. You need to have a serious talk about your child about the cost differences between a private and public university. My wife and me both went to private universities. However, we now teach at public universities. I like public higher education. I am a fan and it is the cheapest option for most students. I also think it is the best option. Just because you go to a private school doesn’t mean you will get a better education.

So I still haven’t answered the question of how much I think I will need to save. Here are the principles I am using:

1. I am using the cost of tuition, room, board, and books at a state university for my baseline of what I save. For example, the institution I teach at is about $25k per year including all of the above costs. Over four years that is $100,000.
2. The average cost of college has gone up about 7% each year for the past 30 years or so. However, tuition inflation has also been going down for the past few years because of the greater concern over college costs. I am still going to use 7% as my baseline, however.
3. I will contribute at least the $2000 to get the tax deduction. However, I can also contribute up to $10,000 per year if I want (not that I have it) to the 529 plan.

If I start with those basic principles and I assume that my son does not take any college classes in high school, doesn’t enroll in any free college programs, and doesn’t have any financial aid (e.g. scholarships or grants) then I basically need to save $447,000.

Let me state that again: $447,000.

That is a lot of money. No wonder so many people are going into student loan debt and/or swearing off college all together.

What Are My Options?

At first glance that $447,000 looks pretty daunting. I mean people are having trouble saving $500,000 in their retirement accounts. What can I do?

1. I will continue to save the minimum of $2000 each year. I actually do that by giving plasma each month. I typically make $300 a month and that has been going into my son’s 529 plan for the past 3 months.
2. I could continue to work until I am 67 at a university that provides its employees some kind of tuition benefit.
3. I can live in a state, which I already do, that offers some form of free college tuition.
4. I could move abroad to a country like Germany, live there, and my son could go to college for free (that wouldn’t be so bad by the way).
5. I can try to scratch and claw and front load as much money as I can into the 529 plan as early as possible to front load the compounding effect of the money that has been invested.
6. I can make my son take some college courses, assuming he wants to go to college, during his high school years and/or take the first two years of his college education at a community college.

All of these are viable options. And I will probably do a combination of the these options above.

If you are trying to figure out how much to save for your child’s education I would use the current cost of tuition and add that 7% number, just to be safe, when calculating how much you need. However, you also need to figure out if your child will live on campus. You need to have a conversation with your child about what kind of institution your child will attend.

I know parents think that they should give their child everything, but a good solid university education can be paid for, debt can be minimized if you do a combination of the options above (save from moving to Germany).

It can certainly be a daunting task, but I am confident that something will be done about the cost of higher education in the United States. Otherwise, Europe is looking better all of the time. Besides, I have never been to a real Oktoberfest.

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