It’s hard to avoid the constant reminders that college in America is outrageously expensive, and that prices have been climbing for years. But don’t lose hope: It is possible to save a meaningful amount for your child’s college education, even if your budget is tight, as long as you make a plan.
The amount you should save depends on many factors, including whether you want to pay for college in whole or in part and whether you’ll prepare for the possibility your child will pick a pricey private college or a public one. Here’s how to come up with a ballpark figure based on current and future college prices and your savings options.
Average Cost of College
The most recent data from The College Board show that in 2020, the average published cost of attendance for full-time students—including tuition, fees, room, board, books, supplies and transportation—ranged from $18,550 to $54,880 per year, depending on the type of school. Here’s how it breaks down:
Not all students will live on campus or attend full-time, and the cost of school equipment and transportation will range widely from school to school. Also, many students will qualify for financial aid, bringing the total price much lower. But you can consider these numbers the top of the range each type of college could charge your student.
When planning for future costs—say, if your child is 5 years old and won’t enroll in college until 2034—inflation and price increases will come into play. In the past 10 years, the Consumer Price Index, which measures the prices of goods and services over time, increased 1.7% annually on average, according to the U.S. Bureau of Labor Statistics.
Compared with other items, though, the prices of college tuition and college textbooks in particular have increased substantially: at more than twice the average rate of inflation between January 1998 and December 2019, according to an analysis of federal data by the American Enterprise Institute.
So how do you factor these increases into college planning? The College Board suggests assuming 5% to 8% annual growth in college costs when you consider how much to save. We’ll walk through an example below.
How Much to Save for College
Unless your family’s income is at the very top of the national average, your child likely won’t have to cover the full published cost of attendance. In 2017-18, 86% of full-time first-year undergrads at four-year schools received some type of financial aid, according to the National Center for Education Statistics.
The average net price of a college is a more reasonable way to estimate how much to save. The net price is how much a student pays after taking into account any grant aid, which doesn’t need to be repaid. The federal, state and school grant money your child is eligible for is determined using the information in the Free Application for Federal Student Aid (FAFSA) and any state- or school-specific financial aid applications.
The grant aid your child receives will depend on your family’s financial circumstances when you fill out these forms. Your income, the number of children you have in college at the same time and certain types of assets will all factor in. But you can use average net price numbers to set your savings goal.
Here is the average net cost of attendance—including tuition, fees, room, board, books, supplies and transportation—for full-time students across different college types, according to The College Board:
(Note: The College Board doesn’t offer a specific breakdown of net price for out-of-state students at four-year public schools.)
Let’s say that as a family, you determine that it is reasonable to prepare for your child to attend a four-year, in-state public college. On average, you’ll pay $77,960 over four years in today’s dollars (though you should keep in mind that many students do not complete their degrees in four years, so it may be wise to plan for five or even six years of college attendance).
Using the example above, if your child is now 5 years old, you’ll start paying for college in 13 years. After plugging today’s total annual net price into a college cost calculator, you’ll find that four years of in-state public college will cost about $158,400 in 13 years, using an average tuition inflation rate of 5%.
You may decide, however, that you aren’t going to save for your child’s full college costs. Perhaps you’ll use some of the income you’re earning at the time your child attends school, your child will contribute their own money, another family member will pitch in or you’ll make use of a combination of all of these.
In Sallie Mae’s 2018 “How America Saves for College” survey, parents predicted savings would cover 29% of their child’s college costs on average. If you plan for savings to pay for 30% of your child’s four-year college attendance, in our example from above, that would be about $47,520. That would mean saving $305 per month for the next 13 years, if you keep the money in a non-interest-bearing account—which we wouldn’t recommend.
Best Ways to Save for College
Instead of saving in a traditional bank account, there are plenty of options for investing your money so you can take advantage of compound returns. An important college savings caveat is that, depending on the strategy you use, investment earnings will add to your total savings.
A 529 plan, for instance, is a tax-advantaged education investment account that individual states offer. Some states give residents a tax break for using their home account, but you can choose any plan you like. As you would in a 401(k) or an individual retirement account, you can typically choose your own funds to invest in or opt for a mix of funds targeted toward your child’s anticipated college start date. That will ensure your investments aren’t too risky or too conservative.
If you save each month in a 529 plan, you could contribute less per month and save the same total amount when your child goes to college. In our example from above, you’d have to save $209 per month for 13 years to reach about $44,000 in savings, if your investments receive a 6% average annual return—a reasonable goal based on historical stock market returns. That’s about $96 less per month than if you didn’t invest your money.
There are other ways to invest savings for college, for instance with a taxable brokerage account, a Roth IRA or a Coverdell education savings account. These plans often aren’t as tax-advantaged as 529 plans, though, and can have contribution limits. In any investment account, it’s ideal to save early and to contribute regularly to get the most out of it.