How Much Money Should I Save for College?
College is more expensive than ever. Here are seven ways to make it more affordable
Next to buying a home, paying for a child’s college education is the biggest expense many families will ever face.
Tuition, fees, room and board for an in-state student at a public university currently average about $19,000 a year, according to the College Board. At a private university, the figure is over $42,000. And 18 years from now, when babies born in 2015 toddle off to college, those prices could seem like a bargain.
While numbers like that can seem scary, they don’t tell the whole story. For one thing, most families won’t pay the full sticker price. About two-thirds of all undergraduates receive grant aid to reduce the cost. In 2014, the average grant was just over $8,000.
Even with generous grants, however, college can be a significant strain on the family budget. Here are some ways to make it easier.
1. Start early. As with any far-off financial goal, the sooner you start saving for a child’s education, the better. The money will have more time to grow, and it will build up even faster if it’s in a tax-deferred account. With a tax-deferred account, such as an IRA or a 529 college savings plan, your earnings aren’t taxed until you take them out — or, in some cases, ever.
2. Open a 529 plan. The money you invest in a 529 plan, and the interest your account earns over time, will be tax-free when you withdraw it, as long as it goes toward qualified expenses such as tuition, room and board. Many states will also give you a tax break for contributing to your state’s plan. If it turns out that your child doesn’t need all the money, you can change the plan’s beneficiary to another family member, including yourself.
A family that can save $100 a month from a child’s birth to age 18 will have some $43,000 available for college, assuming the money is invested in a 529 plan that earns average of 7 percent a year, according to the College Savings Plans Network.
3. Check out prepaid tuition plans. These plans, offered by some states, let you pay a child’s future tuition at today’s prices. With the Massachusetts plan, for example, you can prepay up to 100 percent of tuition at 80 participating colleges and universities in that state. If your child decides to go to college elsewhere or doesn’t go at all, you can get your money back, with interest.
4. Consider a Roth IRA. Though first and foremost a way to save for retirement, Roth IRAs can also help you plan for other purposes, such as college. Putting money into a Roth doesn’t get you a tax deduction upfront (unlike a traditional IRA), but your contributions can be withdrawn tax- and penalty-free as long as you opened the account at least five years earlier. You can begin to withdraw the account’s earnings without taxes or penalties once you’re 59½.
If you need money to pay for college at that point, you can withdraw it — and if you don’t, you can leave it there for your retirement.
Even if you can’t put much money into a Roth at first, Percy Bolton, a certified financial planner in Pasadena, California, suggests opening one as soon as possible to start the five-year clock ticking. Find the rules on Roth IRAs and who’s eligible to invest in one here.
5. Learn how financial aid works. Though it can vary from college to college, the amount of financial aid a student might be eligible for depends on a number of factors, including the family’s income and assets. Certain assets, such as retirement accounts, may not counted against you, so the sooner you begin to move money into them, the better for financial-aid purposes. This government site explains how all that works.
6. Borrow wisely. If you and your child need to borrow money to make up the difference between what college costs and how much you’ve saved, you’ll have several options. As a general rule, federal loans tend to have lower interest rates and better terms overall than private loans, so that’s the place to look first.
7. Consider community college. Even if your child has his or her eyes set on a four-year degree, spending the first two of those years at a community college, then transferring to a four-year one, can make financial sense. A two-year public college for a student who lives in-district currently averages just over $11,000 a year according to the College Board. That’s nearly $8,000 a year less than a public four-year college and $31,000 less than a private one.
Finally, bear in mind that college isn’t the only major goal most of us need to save for. Retirement is another, and many financial planners say it should be our first priority. One reason, they note, is that students can borrow money to pay for college, if need be, but their parents can’t borrow to pay for retirement.
“I always advise parents to save for themselves first, and if there’s money left over, save it for the child,” financial planner Bolton says. “There are multiple ways to finance college. There are not multiple ways to finance retirement.”