I talk to a lot of people who feel paralyzed when it comes to retirement, because nailing down exactly how much they need to save is close to impossible. But in fact, picking a college savings goal can be even harder — there are more variables, including where tuition rates are going to go (no doubt up, but how high?) and what sort of college your child is going to choose.
Luckily, the College Board has done some work to help us answer the first variable — they suggest planning for 5% inflation. They landed on that number by analyzing past college cost inflation rates, which have bumped around between 5 and 8%.
I have a son in college, and a daughter who is well on her way, so I know that sounds intimidating. It turns today’s annual average $21,447 four-year public in-state tuition into over $51,000 in 18 years. Luckily, I don’t think you have to foot the entire bill for your child’s college education, not least because there is plenty of financial aid available (about $227 billion — an average of $13,914 per student — says the College Board). You should also, as you’ve certainly heard me say before, prioritize your own retirement over college.
But most parents — including myself — want to cover at least a portion of the costs, and planning how much that requires is both a numbers game and a guessing game. There are things you can do to generate a reasonable estimate of your needs, even 17 or 18 years in advance. Here, the best ways to define your college savings plan.
Make some projections. As with retirement, there are tools to help you do it. Wells Fargo has one here that will help you project future costs, and how much you’ll need to save to meet them. SavingforCollege.com’s World’s Simplest College Cost Calculator asks you only for your child’s age, then spits back how much you need to save each month (if your child is 0, that number is $561). I’d suggest — as I always do with retirement calculators — that you run a few.
Settle on a target amount. Don’t, as I noted, feel pressured to foot the entire bill. But do figure out an amount that works for you. I’ve often recommended, thanks to a rule of thumb from my friend and frequent source Mark Kantrowitz, the publisher of Edvisors Network, that students not borrow more than $10,000 for each year they are in school. Based on that figure, you can figure out how much you’ll want to save to make up the difference while still balancing other priorities.
Plan for four years at the same institution. Common advice is to spend a few years at community college, then transfer to a four-year school to complete the degree and snag a diploma. But the tides on that may be changing, says Jeff Webster, assistant VP of research and analytical services at TG, the Texas Guaranteed Student Loan Corporation, a nonprofit that promotes college access and completion. The organization recently completed a report, based on borrowing numbers from the National Center for Education Statistics, that found that students who transfer actually end up borrowing more than people who start at a four-year school. “One reason is that the receiving institution tends to not be as generous with institutional aid as they are with people who start at the school,” explains Webster. In the group’s report, the median overall grant aid awarded to graduates by private four-year schools was $11,200 for native students and $6,600 for transfers. The gap for public four-year schools was smaller but still there: $4,300 for native students, compared to $4,100 for transfers.
Talk to your kids about expectations. You’ll notice that in the above point, I said four years. I meant it. That alone can make all the difference — and it’s another reason why community college transfers may end up borrowing more, says Webster. “At those schools it’s much more common for people to attend part-time, and that really drives up costs when you consider that the main cost is room and board. If you’re stringing this over multiple years, your total education costs will skyrocket. Don’t just go to college, go to college with a plan and try to graduate as quickly as possible.” Other things your kids should be aware of: How much you plan to contribute, where they’ll need to pick up the slack, and the importance of good grades, extracurricular activities, and advanced placement courses. Those AP classes alone could lower your costs considerably