Going to college is expensive! Yes, it is costly because education and acquisition of knowledge are basically expensive. Presently, at in-state public 4-year colleges, the current average cost of a college education (bachelor’s degree) is already climbing into the six figures. Also, in the very near future, the most expensive college school may cost close to half a million dollars.
But wait a minute! Knowledge is better than ignorance, isn’t it?
No matter how onerous college education may be, it is a necessary venture. And in any human adventure, planning and careful planning is imperative. So, going to college too needs careful planning and an appropriate saving plan for that matter.
Hence, before stepping into college, my advice is to first get down to the economic drawing board. First, get a clear idea of which type of college do you desire, what course of studies interest you, and what the overall cost will be. This pre-knowledge will aptly give you an informed situation you about to get into so that you don’t run into financial moribund half-way into the program.
There are different types and levels of colleges ranging from public or private universities: ‘In-state public 4-year college, Out-of-state public 4-year college to Private non-profit 4-year college’. The choice of the type of college of your interest has many factors that need careful understanding from the onset.
Check the options and likelihood of getting scholarships and also consider grad school.
By-and-large, you don’t need complete and full correct details of all these before you get into the business of saving for college. You can guide yourself with the following ‘out-of-hand’ indices: multiply your current age by $3,000 if you are thinking of an in-state public 4-year college. For an out-of-state public 4-year college, multiply your age by $5,000 and do the same for a private non-profit 4-year college by $7,000.
This will give you a rough estimate of what you may need to save. Let me state further here that this is not a rule of the thumb as there may other underlying factors such expected rise in the cost of the college of your choice.
One thing is certain, no matter your choice of college, whether in-state, out-of-state, profit-making private or non-profit private college, you don’t bother yourself planning to save for the whole cost. Education financial advisors’ recommendation state you save at least up to about one-third of the total cost for the college of your choice.
This also depends on some factors such as:
- Scholarships
- Parental support,
- Your personal income if you are on work-study
- Other financial aid.
The saving plan for college can be better imagined with this knowledge.
In all these, I recommend that you choose a doable and realistic end goal that will work perfectly for you. Equally, you can use one of the several calculators that are available for this task. There are several of such which shall be considered here. For instance, if your end goal is $73,700 for a public in-state college, you need to set a doable and realistic monthly saving goal tool to realize your goal.
How to Calculate How Much You Need to Save for College
You need a monthly saving program that needs to be in consonance with your end goal of at least one-third of the total cost for the college of your choice. In this case, the end goal is taken as $73,700 for a public in-state college. One-third of that amount is $24,566.66. Let’s round it up to $24,600. If your realistic monthly saving is set at $400/month, then it will take you an estimated 61.5 months (approximately five years to hit your target. This translates to the fact that you need to save $400 per month consistently for five years.
Setting a Monthly Personal Savings Goal
Another great tool is to set a monthly savings goal for college based on what you and your family can afford. This is a good approach if you can stick to your budget. This is achievable if you do a realistic analysis of your monthly earnings, expenses, and incidentals.
You can reach a consensual agreement with yourself on what is realistic to save on a monthly basis.
There is a hybrid version of this tool. It is where you don’t peg your monthly savings to a set amount. In this case, you save according to what you can afford each month, especially if you are not on a fixed income. This system affords you to save far above your set monthly goal in some cases. The only downside of this approach is that you need a clear financial discipline; otherwise, things may fail to work the way you’d planned.
The Lumina Foundation’s Rule of 10 formula may help you to implement this approach realistically.
Using this strategy requires using the benchmarks:
- Families must save at least 10 percent of their discretionary income; which means total after-tax income less all monthly expenses
- Families to diligently save for over a period of 10 years; and
- That students work 10 hours per week while attending college complement earnings.
Over ten years, that’s nearly $51,000 saved for college.
A working student (working 10 hours a week for 50 weeks) per year using the current $7.25 minimum wage, will earn an additional $3,625 for a total contribution of $14,500 for 4 years. In case your income shifts downward or upward, you can adjust your contributions to meet the change. You may complement the shift farther by using a tax-advantaged savings scheme to grow your money accordingly.
The 529 College Savings Plan
Another great idea of saving for college is using the 529 college savings plan.
It is a specialized savings account that can effectively be used to save money for college.
Your savings in a 529 plan may be used to cater for all college expenses and tuition of the registered beneficiary. Happily, enough, it is tax-free.
The 529 plans have been proven to be helpful to many families for its effectiveness and reliability. This plan helps families to achieve their college savings goals without stress.
Though a 529 plan has proved to be a great tool to save for college, be it public or private school, but its only major downside is that it lacks the flexibility of other accounts. You are only privileged to make tax-and penalty-free withdrawals for educational costs only; your money in the account is dedicated to education funding only.
Using 529 plans will allow you to enjoy great offer unsurpassed income tax breaks. Also, earnings in a 529 plan grow federal tax-free, and it is totally tax-free when the money is used to pay for college. Equally, the monthly contribution is much lower because of your money yields over time.
The projected monthly contributions with a 529 plan for a child born in 2017 range from about $165 for a public in-state school, $260 for public out-of-state, to about $325 for a private university.
The 529 plans offer unsurpassed income tax breaks.
Listed Below Are Some of the Benefits of 529 College Savings Plans:
- Contributions to 529 plans are not deductible but the earnings grow federal tax-free and it is tax-free when money is used for the purpose of paying college costs. This may include withdrawals up to $10,000 in tuition expenses per year for each beneficiary. This condition is applicable to other savings vehicles, such as mutual funds
- The 529 has been a great incentive and motivation for Americans to imbibe the system to save for college.
- As a contributor with 529, you may enjoy tax breaks from your state too. You can claim all state tax benefits once you make your contributions.
- As a contributor, you remain in control of your account. Except you legally permit it, the beneficiary of your funds does not have a claim to fund, except for the purposes of college costs. You as the donor can make a withdrawal from the account for other uses but that portion will not enjoy tax-free benefits.
- 529 plans are very accessible and easy to use. You can easily go for the best option that matches your college savings plan.
Traditional Savings Account/Usual Taxed Investment Account
In the alternative, you may decide to use the common traditional savings account or the usual taxed investment account. In this case, you may need to adjust your monthly contributions to meet the demands of the cost of the college of your choice. Using this traditional savings method is subject to the prevailing interest on savings accounts for the period.
This will mean that your monthly contributions will be about $300 per month for a long period of 18 years for a public, in-state college, or about $500 for out-of-state college and about $600 per month for a private university. This is about twice the monthly contributions required for 529 plans.
If you choose to opt for a taxed investment account, you can have appreciably better returns on your savings. The returns stand at an average of 7 percent annually. This will significantly bring your monthly contributions to about $190 for a public in-state university, close to $300 for an out-of-state, and about $390 for a private college. But in this case, you will not enjoy the tax exemptions on dividends and gains like using the 529 plan.
Quick Takes
It is normal to have a clearer understanding that college costs keep on climbing over time. Hence, the cost in terms of tuition and other college costs may sweep you off-guard if you are not well prepared by making adequate and well laid-out education saving plans in place. It will make things messier and stressful in the future.
The ‘little’ but methodical monthly college saving plans of today takes away any form of mess and stress of tomorrow.
You can start early and small, but make it consistent. You only need consistent, well-thought-out monthly contributions on your chosen college savings plan. Starting a college saving plan on time (possibly from the day a child is born) makes While it’s easy to get sticker shock from skyrocketing college costs, remember that the amount you need to save is likely much lower.
Remember that your college saving scheme can be complemented with some Financial aid, scholarships, your personal income, student work, and contributions from family and friends.
