How Much Should You Save for Your Child’s College Education?

Written by: Kristyn Pilgrim
Updated: 6/01/20

Every parent looks forward to milestones in their child’s life. But high school graduation can also be a frightening time for families. During the 2016-2017 academic year, private universities cost an average of over $41,000. When facing the prospect of paying around $164,000 over four years, it’s understandable that parents and students alike worry about financing higher education. 

Most parents worry about saving for college. Yet, many parents do not know how much money to save or how to set aside funds. Luckily, there are several ways to figure out how much you should save for your child’s college education.

Know the Important Numbers 

Before you can determine how much you need to save or want to contribute, you’ll need to have some information. Knowing these important numbers will help with your planning process.

  • Your child’s age: The amount of time you have to save for your child’s college education will influence your saving strategy. 
  • Your predicted income during your child’s college years: Do you plan to retire before or during your child’s college career? Working parents can contribute more to expenses than those without active income. 
  • Tuition and fees: Tuition is the amount a school charges for taking courses. While the amount varies from school to school, the national average is $23,091. In addition to tuition, most colleges charge nonnegotiable fees. While each school determines its own fees, common charges include transportation, student activities, and laboratory fees.
  • Room and board: Families should also consider the student’s cost of living. Colleges often provide cost estimates of room and board for students who live on-campus. However, even students who live off-campus will have living expenses. And without a campus meal plan, there will be grocery expenses. Be sure to include these in your cost estimate. 
  • Living expenses: Beyond food and shelter, students will have additional bills. Even on-campus students will need a cellphone, clothing, school supplies, and many other items. Do not forget these costs as you plan. 
  • Transportation: All students will need a travel budget. Off-campus students will need to pay for a car, bike, or public transit to get to campus. On-campus students will need to leave campus occasionally to run errands. Both types of students will need to come home on breaks and holidays. The cost of a plane, train, or bus should be included here. 
  • Books: Books are an important but often overlooked cost. Because college textbooks are often lengthy and have many full-color illustrations, they can be quite expensive. The average estimated cost of books and other supplies during the 2019-2020 school year was $1,240. This cost should be included in the budget for each of the four years. 

Decide How to Save

After adding the cost of tuition, room and board, transportation, books, and other expenses, most parents will decide they cannot provide 100% of their student’s college costs.

To set a savings goal, parents must first determine what percentage of their student’s education they are able to fund. While several formulas are used to help parents estimate how much they should save, one of the most popular is the “one-third rule.” This rule advises parents to aim for saving a third of their child’s estimated college costs.

Another way to set a savings goal is the “2K rule.” This rule asks parents to save based on their child’s age. Ideally, a family would start saving for college from birth and save $2,000 each year. So, for example, a family with a 13-year-old child should have saved $26,000 for the child’s college expenses. If a family has not been able to save, the 2K rule can help the family set a target. 

Finally, the “rule of 10” allows families to consider their circumstances. This formula assumes that: 

  1. Parents will save 10% of their discretionary income for college.
  2. Parents will save this 10% over 10 years.
  3. The student will work 10 hours per week in school.

The formula a family chooses is not important, but using one of these formulas will help families take the important step of setting a savings goal.

Determining How Much You Should Save for Your Child’s College Education 

After setting a savings goal, a family should determine how much they can commit toward that goal each month. But the family must also decide how to save that money. Fortunately, families have a variety of options at their disposal. 

Two types of accounts are designed specifically for college savings. A 529 plan (so-called because it falls under Section 529 of the Internal Revenue Code) allows families to place money in investment accounts that rise and fall with the stock market. These plans, which are administered by the states, often carry tax benefits. There are no tax consequences as long as the money is spent on “qualified educational expenses,” such as tuition or room and board. However, there may be federal and state tax penalties for deductions unrelated to education. 

A Coverdell Education Savings Account (ESA) also allows families to contribute. While similar to a 529 plan in many ways, ESA investors have more control and can make riskier investments. Also, ESA contributions must be made in cash. Finally, unlike a 529 plan, which has a high cap on contributions, parents can only contribute $2,000 to an ESA each year. 

Beyond college-specific accounts, parents can use regular savings accounts to save for college. These accounts do not carry the risks associated with investments, which can cause accounts to dip if the stock market tumbles. However, this also means that regular savings accounts will not grow as quickly. Yet, there are no penalties for withdrawing money from a normal savings account.  

What If We Haven’t Saved Enough for Our Child’s College Education?

If college is just around the corner, but your family has failed to meet its savings goal, do not fret. Many families encounter this difficulty. With a little creativity, families can make college more affordable. 

First, look for free money that does not need to be repaid. Scholarships are awarded based on high achievement or economic need. When your student receives an acceptance letter, the school may include a scholarship offer. If the school does not offer a scholarship, look for scholarships, and apply for them. 

Unlike scholarships, grants are given solely based on financial need. Filling out the college’s financial aid forms and the Free Application for Federal Financial Aid (FAFSA) will help the college determine if you are eligible for grants, scholarships, and even work-study programs.

Second, consider borrowing. The federal government offers loans for both parents and students. Private lenders also provide funding. After carefully calculating the amount needed and the family’s ability to pay, parents can borrow the lowest possible amount to limit their debt burden. 

Third, remember that you can contribute during college. Parents who work during a student’s college years can use those earnings to defray college costs. While it might not be as much as 30%, it will certainly help the student and reduce the overall costs. (Also, the college will use FAFSA responses to determine your expected contribution.)  

Finally, factor in the student’s ability to contribute. A family should not feel guilty for asking a student to work. Seventy percent of students work full- or part-time jobs while studying. Working can teach students time management skills and help them better appreciate the cost of their education.

Helping Families Save for a Child’s College Education

Sending a child to college is an emotional experience. It can also cause added financial stress. To learn helpful information that can reduce financial anxiety surrounding college costs, trust College Finance. Our team is committed to giving families expert advice on all topics related to paying for college.