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How Much to Save for College for My Child?

How Much to Save for College for My Child? post image baby college fund

Last week I looked into when to start saving for college for your child(ren). I shared some financial milestones I thought parents need to be on top of before they sock away college money. Looking at the comments on the post, there were many differing and strong opinions.  Some saying that it’s never early to save and others say that parents aren’t under any obligation to pay for their child’s tuition. Please continue share your thoughts on the topic – I think looking at the different perspectives can help shape up your family’s financial plan.

This week I want to tackle how much parents should save for their child’s college fund based on Couple Money reader Becky’s question:

I was wondering if you were going to do a post on how you are preparing for the baby’s future financially (college, etc…) We are expecting in August and are starting to plan for these types of things.

Our biggest worry/concern is starting to act now to plan for college for our child. We really don’t want them to start their adult life with that debt hanging over their head. Any suggestions on that would be awesome.

I’m going to share what I’ve found, but I’d love to get your feedback on how you’re handling your own situation.

Rising Tuitions – Moving Target for Savings

Rising tuition costs have been in the news. Since costs does change drastically from time to time, it makes it much harder to figure out a plan. I searched to see if there was some information on the topic and I did find some hard numbers. I decided if I can use a ballpark figure, it’ll make it much easier to come up with some sort of plan for college savings.

How much does college tuition cost? Without considering the cost of room and board, here are some average tuition costs.

  • Public four-year colleges charge, on average, $7,020 per year in tuition and fees for students who live in their state. The average surcharge for full-time out-of-state students at these institutions is $11,528.
  • Private four-year colleges charge, on average, $26,273 per year in tuition and fees.
  • Public two-year colleges charge, on average, $2,544 per year in tuition and fees.

Source: College Board

For estimates later in the post, I’m using the public four year degree fees as part of my estimates. That gives us an estimated total of $28,000. If you want to instead use the private college costs, please adjust the numbers below.

Options for College Savings – 529 Plans and Coverdell Education Savings Account

One decision that you have to decide on is what tax advantaged savings plan you’re going to use. When looking at your options, you should consider the affects of the account(s) on your specific family’s financial circumstances and taxes. The IRS has Publication 970 that cover the topic in detail. Unless otherwise stated, I used it for the reviews below.

529 Plans

A 529 plan, also known as a Qualified Tuition Program (QTP) is a tax-advantaged savings plan.  Contributions to 529 plans are not federally tax deductible, but qualified distributions are deductible. States can offer programs that allow parents to prepay tuition or invest their contributions for their children’s educational expenses. For many parents, it’s a better deal to not do the prepaid tuition and instead invest their contributions.

There are some nice advantages to 529 plans:

Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. The beneficiary generally does not have to include in income any of the earnings from a QTP unless the amount distributed is greater than the beneficiary’s qualified higher education expenses.

Evan from My Journey to Millions shared why he chose a 529 plan for his adorable baby boy.

Most, if not all, States have their own 529 Program, however, you are not forced to use one state over the other.  There are some states which choose to provide bonuses upon sign up, or more importantly provide state income tax deductions for 529 c0ntributions.

Luckily, New York is one of those States that provide a State Income Tax Deduction..

If you’re looking into setting up a 529 plan, I suggest reading up some of these great posts:

Coverdell Education Savings Account

Another option that some parents prefer is an ESA. The biggest difference I noticed right away was the contribution limit on the account. Here’s a bit more about the account from the IRS:

The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.  The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution.

There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income.  Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

As tax laws can change year to year, visit the IRS’ site to determine what the MAGI is for the current year.

Decide Which is Right for You

After examining the pros and cons of the 529 plans and Educational Savings Accounts, sit down and decide what’s best for your family.

Looking at the Time Frame

Now that we have a figure to work with, you have to examine your own personal time frame. Obviously the more years you have between when you start investing/saving and when your child is going to college, the better for your finances.

Let’s say you decided to just save the money and not invest it, here’s how it breaks down on a monthly basis:

  • 18 years -> $129.63/month ($1,555/year)
  • 15 years -> $155.55/month ($1,866.67/year)
  • 10 years -> $233.33/month ($2,800/year)
  • 5 years -> $466.67/month ($5,6000/year)
  • 4 years or less – As much as you can!

A quick mention about investing versus saving- if your time frame is less than 5 years, it would be safer to save that money in a high interest saving and not invest that money.

A Little Perspective

Did you know that the average car loan being around $26,300 ? Looking at it, $28,000 is like a big car loan. If you really want your kid to have their college tuition paid, then dumping your car loan looks like a great way to free up your money for it. I’d also point out that if you get a tax refund, you could sock away some or all of that without hurting your monthly finances.

I just wanted to note that perhaps the reason some are struggling to save is because they have too many obligations with their money. With a little fine tuning you may be surprised at how (relatively) easy it is to save for your child’s college fund.

Thoughts on Saving for College

I would love to get your feedback on this huge concern for many families. How many of you are starting to save for your child’s college fund? How much do you think parents should help with college?

Photo Credit: Schlüsselbein2007

by Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  1. I’ll start saving for their college from birth, I guess, but I won’t pay for everything. I want them to feel like they have a stake in things, too, and that it’s not just a free pass. Then again who knows what the educational system will be like in 20-25 years.

    Thanks for the mention!

    1. I’m glad you have general plan. I agree that paying for absolutely everything might not be the best course for everybody. Having a little skin in the game can be motivating.

  2. Even though we haven’t had a child yet, we’re already thinking about college savings. I didn’t think about investing though; that’s a good idea! I want to start as soon as the kids are born. Originally the plan was $500/month until graduation or their 18th birthday (whichever comes first). That’s $6,000 a year for 18 years ($108K). I won’t know if they’ll want to go to a public or private school, but that covers a $27K/year tuition. It all depends on our income as well.

  3. What a TOUGH area right? I don’t have a lot going into that 529 I set up, I am thinking I should up it soon, but at the same time there are personal goals I’d like to attack.

    The Wife and I also made a decision that most dollars that come in for him – 1/2 to college fund and 1/2 to liquid account for his benefit.

    It is hard for me to understand how most people aren’t obsessed with personal finance lol.

    1. I was talking to my wife about this recently and we came to the realization that by the time our kids are ready for college, it’ll likely cost 100 k a year for a private school! (OK, maybe an exaggeration) but the sad thing is that probably not by much. Better get on those 529 plans!!!

    2. Yeah; this is tough one Evan :)
      We too are trying to knock out a few financial goals first that will allow us to knock out debt and give us some money that we can direct to our child’s 529.

      Right now we’re building up her savings with gifts from family and friends plus whatever we save on with one time expenses. Growing pretty nicely right now.

  4. Pat S – I actually agree with you – I am budgeting / assuming that college (including room & board, etc.) will be $100k per year for our toddlers. I feel guilty admitting it or discussing it with friends because it seems so outlandish, but analytically it is perfectly realistic (and maybe even too low!!!)

    We are fortunate in that, although it is a committment and somewhat of a sacrifice, we are in a financial position to at least try to save that much without unduly compromising other financial goals such as retirement and paying down our mortgage. We put in $1,000 per month into our 529 account and try to add another $5-10k at year end when we get a bonus. We figure we will get up to the max 529 balance of $350k when they are between 10-12 and then that should be enough.

    I know is very high and a lot more than most people are able to put in which we feel very fortunate about, but we also feel like we are being realistic in assuming that 1) our kids won’t necessarily get scholarships and 2) we are in that middle ground of college still being a big cost to us, but making enough money that we won’t qualify for financial aid.

    I realize that we don’t have to pay for college for our kids and they can have jobs or take out student loans, but we’d like to try and maybe leave the kids to get a part-time job to pay for social expenses, etc.

    1. Thanks FD for your comments. I appreciate and respect that you are trying to save for your kids’ college fund without putting the family’s finances in danger. I feel like some parents have harmed themselves financially by socking away college savings without really analyzing how it will affect other aspects of their lives including retirement.

  5. I have a somewhat unrelated question. I have a daughter (step daughter) heading to college with a partial scholarship, and my husband, my husbands ex wife, and I, are all splitting the remaining tuition among us. My parents meanwhile are interested in establishing and funding an account on her behalf as a graduation from high school/college gift, which upon graduation she could apply toward a deposit on an apartment, or a graduate education. My question is with regards to the account options available, and whether there are any that are contingent upon graduation. I imagine the answer is no, but I thought I would ask none the less. Thank you in advance for your reply!

    1. Parent #3: Good question- when we looked graduation wasn’t on the requirements for the account, but I’d check with whatever provider you’re thinking of going with to be sure.

      From my understanding the big concern is making sure that the institution is eligible. According to the IRS’ site:

      “An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.”

      I laso wanted to mention that Jeff Rose from Good Financial Cents has written about extensively about education plans and has some great resources on his site.

  6. Wow, lucky you guys. My husband has a great job, and we don’t even have an extra 100 a month at the end of the day to save for ANY of our kids colleges. Neither one of our parents paid for ours, and I don’t think parents should have to go into debt and have to pay for student loans, when they too are trying to survive. ….These comments by others all seem out of touch with reality…I don’t know anyone who could save over 100,000 per kid for college, (which is absolutely ridiculous), and I come from a upper middle income family.

    1. We all live in our own realities and play the hand we are dealt in life to the best of our abilities. Not everyone can or will benefit from going to college. Everyone’s financial plan is their own based on the choices they make for themselves. Some people sacrifice more for their kids future than others but there is no right or wrong answer. Love your kids and love one another. The short time we have here on earth should be made the most of, you can’t take anything with you in the end.