How much do I need to save to send my kids to college?
There are more parents with student debt today than there ever have been before. As the new generations of college graduates start families they are left with the very complicated question of how much to save for their kids’ college education. I’ll give you an answer: $682 per month.
A small disclaimer: That’s probably not the right number for you. If you live in Indiana and you know that your one child will go to an in-state school even though they are only in kindergarten right now and you can guarantee yourself a 6% rate of return on your 529 account and the cost of tuition only goes up 3% between now and 2038, then maybe that’s the perfect number for you.
The truth is that it’s an extremely personal decision for a number of reasons.
What if your child decides to go into a skilled trade?
How much is a comfortable amount to save?
What if you already have a lump sum saved?
What if your child wants to go to an out-of-state school?
How do scholarships factor in?
Each family has to decide what’s best for their specific situation but here are three things that should help.
Here is the link to a great college cost calculator: College Savings Estimator
You can ignore most of the info on this page and just scroll all the way down to the college savings estimator. This is one of the tools that I use for my clients. It is a quick way to find out how much different college options will cost and how much you would need to save in order to fund them. It’s totally free and it’s a tool you can come back to year after year to check your saving progress.
Use a 529 account.
The parents I talk to often get hung up on the logistics of a 529 account. If you are a Hoosier, I recommend using https://www.indiana529direct.com/ . You don’t need an advisor to open a 529 account. You can invest the money without paying tax on the earnings if the money is used for qualifying education expenses. 529s can even be used to pay for some trade schools. You have options if you overfund the account or if your child doesn’t go to college.
There’s a concrete benefit to contributing to a 529 in Indiana. You can earn a state tax credit up to $1,500. It’s 20% of each dollar you contribute up to $7,500. So if you put in $100 per month, you will be eligible for a $240 state tax credit. Those are real tax dollars you can save each year.
Start saving now.
Even if you can’t decide how much you want to save in total, start with something small and repeatable. Many people choose to use a payroll deduction into a separate account so the funds come out automatically. The earlier you begin to save, the longer the money has to grow.
If you contribute $7,500 the year your child is born and invest it at 6% per year, your contribution will be worth $21,407. If you wait until that child is a freshman in high school and make the same contribution, it will only be worth $9,478 by the time they go to college. Early and repeating contributions can quickly chip away at the large task of paying for college.
It’s important to be kind to yourself as you plan for your child’s secondary education. The cost of tuition and room and board has skyrocketed. Paying for a child’s education can be a great gift but it is not necessary. There are federal and private student loan programs in place that make attending university accessible for most students with very little additional cost. I personally had nothing saved for college when I went.
I think of paying for a child’s college as reducing their future debt. You don’t have to pay for all of it! Every little bit helps. There are trade offs for everything. A dollar toward college savings may be a dollar that didn’t go to retirement savings. A popular adage among advisors says that you can always finance college, you can’t finance your retirement. So, it’s up to each family to identify their goals and prioritize those that are the most important to them.
