How Much To Save For College: What’s Right For You?

September 27, 2021
investment strategy

You want to help set your loved ones up for success in life. 

Depending on the career path they choose, that success could include a college education. So, knowing how much to save for college and creating a plan to reach your goal is a must.

Getting a post-secondary education can be expensive. You care about the child in your life, and you definitely don’t want them to be burdened with tens of thousands of dollars in student debt.

By starting to save early, you can take advantage of compound interest and tax-advantaged accounts. Even small-but-regular savings over time will add up to a significant amount.

There’s also an important factor to consider that most people neglect: what if a child doesn’t end up attending college? You’ll need to understand what options you have for the money you’ve saved in that situation.

This article will explain how much to save for college. We’ll talk about some basic rules of thumb to follow, the best ways to save for college, and how to custom-tailor college savings for your specific life situation.

How Much To Save For College

In December 2020, the average 529 college plan balance reached a record high of $28,679

Now, 529 plans aren’t the only option for college savings, but they are a popular one. So, this stat is a useful starting point for how much you may want to save. 

Of course, the amount you’ll need to send your loved one to college will depend on several different factors.

College savings poll data
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Here are some questions to consider:

How much of their education are you planning to pay for? 

Some families will cover 100% of the college cost, while others may only be able to cover 30% or less.

Will the child be attending an in-state or out-of-state college, and will it be public or private? 

College tuition costs also vary greatly between different institutions.

The average annual tuition for a public four-year college in the 2019-20 school year was $10,486 for an in-state college student and $15,873 for an out-of-state college student.

How long do you have until your loved one is ready for college? 

Experts have estimated what tuition costs will look like in 18 years based on historical tuition prices. 

If the child in your life will be attending college in 2040, you can expect to pay around $50,000 per year for them to attend a public school.

Another study suggests that a full four-year degree will cost about $182,000 at an in-state school or $414,000 at a private college around that time.

When considering the cost of college, it’s important to consider the overall cost of attendance, not just tuition. Some other college expenses to consider include:

  • Fees: These include orientation fees, campus fees for athletics and health services, and other costs that can add up to thousands of dollars on their own.
  • On-campus or off-campus housing: Unless the student is attending college in their hometown and living at home, they’ll usually need to pay for a place to live.
  • Meal plan or a food budget for groceries: A meal plan is usually mandatory for those living on campus.
  • Transportation: This could be a bus pass. It could also be vehicle maintenance, insurance, and other transportation costs.
  • Textbooks: Many textbooks cost hundreds of dollars and can change significantly between editions, so a student often has to buy new.
  • Supplies: This includes basic school supplies, such as pens and paper, a backpack, a flash drive, sticky notes, and highlighters.
  • Equipment: Most college students need equipment such as a laptop, phone, printer, and other electronics.
  • Disability accommodation: If the child has a disability, whether mental or physical, they may need to pay extra money for accommodations.
  • Personal expenses: This includes any other costs incurred while attending school.

The Order of Operations When Saving For College

Every family has different goals for their children regarding a college education. We all have our own specific situations and challenges that we face.

The acronym Y.E.S. can help you figure out how to prioritize costs that are specific to your situation.

Y stands for ‘You.’ Before you start saving for the college education of a child in your life, it’s important to get your own financial priorities in order first.

This means making sure that you can pay for your mortgage and other debts, monthly bills, and other basic necessities such as food and clothes.

E stands for ‘Education Savings Account.’ This is a dedicated college fund, like a 529 plan or Coverdell ESA, that you’ll contribute extra money to once your basic finances are covered.

S stands for ‘Savings.’ The child in your life is likely going to have expenses that don’t qualify as an educational expense. This includes things like a car to drive to school or new clothes as they grow. 

Depending on where you save your money, the child in your life can even use it to go on a trip after high school or start a business.

This is the next step if you’re able to regularly pay all of your personal expenses and contribute to a college fund already. These savings are normally kept in a custodial account, like an UGMA account

Keeping this money in a custodial account allows the child to use it for non-education-related expenses without paying a penalty.

How Much To Save For College by Age

You can use online resources to help you see if you’re saving enough for the child in your life’s college education. These online resources usually create calculations based on the child’s age.

Here are Saving for College’s estimates of how much money you would need to save per month in order to cover 100% of college costs for a child in your life: 

How much to save based on age public college
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The earlier that you start saving for college, the less it will end up costing you overall. 

That’s because your initial savings will start to generate interest as a child grows up. It’s no wonder why 42% of people say they wish they started saving for college earlier.

Fidelity Investments has a handy calculator to help you to see if you’re on track to meet your college savings goals. Simply plug in the child’s age and a few other details.

Using Fidelity Investments’ college savings calculator, we can see that:

If you started saving for a child born today and want to cover 50% of their public college costs, you would need to save about $200 per month.

If you were to start saving for a child that’s currently 10 years old, and you have no money saved so far, you’d need to contribute about $350 per month to be on track to meet your goal.

Making a college savings plan early and sticking to regular contributions will help you to hit your savings goal. 

One of the best ways to save for college is to have the money directly taken out of your paycheck. This way, it happens automatically, and you don’t have to think about it. You can always revisit your plan if your financial situation changes and make adjustments.

In the next section, we’ll discuss some popular rules of thumb that help people determine how much to save for the student in their life.

Saving For College: Common Rules of Thumb

There are all kinds of approaches to saving for college. Let’s walk through four of them.

The rule of 10

This is a good general rule that suggests saving 10% of your discretionary income for 10 years in order to pay for college

Discretionary income is the money you have left over after all of your monthly expenses are paid.

This approach assumes that the student will also work 10 hours per week while they’re in college to make up for any shortfall.

With this method, how much to save for college per month will depend on your discretionary income.

For example, if you have $400 left over each month after paying all of your bills, buying groceries, and other required spending, then you’d put $40 of that into college savings.

The good thing about this rule is that it’s flexible. You can use it regardless of how much or how little you earn. 

As long as you have some discretionary money left over after you’ve covered basic necessities, then you’ll be able to put away some money for college each month or pay period.

The 1/3 rule

This rule explains how much of a student’s college costs will come from different sources. It recommends the following:

  • 1/3 of college costs are paid for with savings as the child grows up.
  • 1/3 of college costs are paid with money you earn while the child is in school for four years.
  • 1/3 of college costs are covered by scholarships, grants, or student loans.

As an example, we can take the estimate mentioned earlier of a four-year degree from an in-state school costing $182,000 by 2040.

For a child born today, you’ll want to save 1/3 of that amount, or about $60,000, by the time the child is ready to attend college. 

Keep in mind that some of this money will be earned in the form of interest, especially if you start investing early.

70% college savings rule
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The 2k rule

The 2k rule gives guidance about how much you should have saved for a child based on their age.

The idea is that to cover 50% of the cost of a public four-year college, you should save $2,000 each year of the child’s life.

So by the time the child is 14 years old, you should have $28,000 saved. 

The “just do it” method

Not everybody has enough disposable income to add to a college savings fund on a regular basis. 

Investing early on and regularly is ideal, but it’s not realistic for some people.

Following the “just do it” method means saving when you can and as much as you can afford. 

Maybe you can’t contribute to a college fund from every paycheck. But you might get an annual bonus at work that provides you with a lump sum that you can put entirely into college savings.

Whenever you get an unexpected windfall, like inheriting money from a relative, you can put those amounts into a college savings account for your loved one.

Best Ways To Save For College

Once you’ve used the rules of thumb above to decide the best way for you to save for college, you need to decide on a type of account to use.

The most common options are a 529 plan or a Coverdell Education Savings Account. 

Some people also set up a prepaid tuition plan with state institutions for the child in their life. This lets you pay tuition costs at current-day prices and avoid tuition price inflation.

prepaid tuition vs education savings plan college comparison
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You can also set up a custodial savings account for the child in your life. This type of account will provide them with the flexibility to use the money for education or other important expenses. 

EarlyBird is one of the simplest ways for friends and family to invest in the financial future of the children in their life. 

Money saved using EarlyBird can be used by the child in your life for anything, not just qualified educational expenses.

Tips for reaching your college savings goals

Here are our top tips to help you get on the right track so that you can reach your college savings goals: 

  • Start early
  • Establish realistic and clear financial goals
  • Make regular contributions
  • Automate your savings plan with automatic withdrawals or roundup strategies
  • Invest extra cash (such as bonuses, inheritance, tax refunds) whenever you have it

How Much Financial Aid is Available For College Students? 

Once the child in your life is ready to attend college, they should fill out the FAFSA (Free Application for Federal Student Aid).

Filling out the FAFSA will give them the most comprehensive look at the financial aid they’re qualified for. 

After completing the FAFSA form, they’ll receive an aid offer. This explains the amounts and types of aid being offered to them. It'll also provide expected costs for the year, depending on the colleges that they’ve selected.

The FAFSA also lets students know about scholarships, bursaries, and grants they’re eligible for.

fafsa financial aid explained
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It doesn’t cost anything to apply, and there’s no obligation to accept the aid that’s offered. So, all students should fill it out to see what they’re entitled to.

What Happens To Your Savings If The Child Doesn’t Attend College?

If the child in your life decides that college isn’t in their future, there are still things that you can do with college savings that you’ve invested for them.

Some forms of college savings are more flexible than others. 

For example, 529 plans never expire, so you can let them sit in case a child decides to go to school later. Or you can even transfer them to another child or grandchild. 

In contrast, Coverdell ESAs are limited by the age of the beneficiary.

Worst case scenario, you can choose to withdraw money out of a 529 plan or Coverdell at any time. The downside is that you’ll have to pay tax on earnings, plus a penalty.

With a custodial account like a UGMA, you don’t have to worry about these penalties since the money isn’t restricted to just education-related expenses. The child can use the money for whatever they wish.

Start Saving For the Child in Your Life

How much to save for college is highly dependent on your personal situation. 

Some people may have enough discretionary income that they can simply make automatic deposits into a college savings account from each paycheck. 

Others will need to be more strategic and set aside money when it’s available.

A custodial account like a UGMA is a great option to use to set aside money for the child in your life because of the flexibility it offers. 

A student may face many costs after high school that aren’t qualified education expenses, and a 529 plan or ESA is limited in terms of what they can spend the money on.

EarlyBird allows you to launch an investment account in just minutes

Friends and family can contribute to a single account and start building wealth for the kids in their lives. Best of all, the child will be able to use the money for whatever is important to them once they’re old enough.

Get started by downloading the EarlyBird app today.

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