Thursday, October 12, 2006

Saving Money for College

It has been many years since I have thought seriously about paying for the cost of college. Now that we have a two year old daughter, I have started considering challenges again. At the rate college costs are rising, I estimate we may need to pay over $90,000 per year for a private college education in 2022. That is scary.

I also have read about some college graduates having $40,000 to $60,000 debt ($20,000 on average) when they complete their education. Sometimes a significant portion is credit card debt. This is scary too, especially, since many jobs have starting salaries around $30,000 to $50,000. It’s tough to start saving when a college education creates so much debt.

Here’s an overview of my current thinking on saving money for college:

My personal goal is to enable our daughter to graduate from college with zero to $10,000 of debt. To do that, we are aggressively contributing to our state’s 529 college savings plan. (A side benefit is a state tax deduction.) In addition, the grandparents have opened college savings accounts for her. I am aware of other tax advantaged educational savings accounts (Cordell) but have not investigated them in detail yet.

We will also look for schools that provide sufficient financial aid to cover costs that we cannot cover. This can range from attending a state school to an Ivy League school. For example, Princeton University has a policy of providing enough financial aid to eliminate the need for student loans. Also, at the appropriate time, we will apply for grants and scholarships.

There are also tax credits (Hope and Lifetime Learning) which are dependent on income limits. However, I expect we may be higher than the maximum income limits.

Finally, I will expect her to contribute the majority of her summer job earnings in high school and college to tuition. I remember doing this when I attended college and it made me appreciate the cost of and value of attending college.

Overall, I feel we are off to a good start since we are starting so early. However, it is still a daunting task. For example, if we are to completely cover my estimate of a $90,000 tuition per year starting in 2022, we will need to save $12,000 per year and earn an average of 8% investment returns during that time. I am glad we still have 16 years to plan and save for a college education.

This is not financial or college advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

7 comments:

GolbGuru said...

Some of those numbers are really scary. I think I will start some fund even before our first kid is born (if that can be done)

Super Saver said...

Golbguru,

I was suprised by magnitude of both the estimated future tuition and savings per year needed.

For reference, to be conservative, I used a high tuition number as a starting point. One of my colleagues, whose child is applying to college, told me the high side tuition for private schools was about $42,000 per year today. I applied a 5% growth rate to get the $90,000 future estimate. So the cost and savings needed will be lower if an average tuition cost for today is used.

Also, some of the education savings plans, 529s for example, can be started prior to your child being born. You can open it in your own name and transfer it to your child at a later date.

WorriedAboutCollegeDad said...

Ive seen numbers very similar to yours and it is indeed a daunting task to start saving for college. You can never start to early is what everyone says. I also use 2 savings for college sites called Little Grad and Upormise. They give back a % or $ of whatever I spend on their site.

Good luck with the savings and I hope more people are aware of how early they have to start saving to pay for their child's education.

Super Saver said...

Worried,

Good luck to you also.

I have started a UPromise account too, but have only accumulated less than $1 after a few months. I'd be interested to hear if people are getting signifcant savings from such accounts.

Tiredbuthappy said...

Yep, it's scary. My goal is to pay for 50-75% of a state college education for my son, age 3.

I have a Fidelity credit card (it was MBNA til a few weeks ago, now it's FIA) that contributes 2% of all my purchases to my Fidelity 529. These days 2% cashback may not be the best deal you can get, but it's not too shabby either.

FIRE Finance said...

Thanks for this informative post. We have listed you as one of our favorites from the Festival of Frugality #48. Keep up the good work.
Cheers
FIRE Finance

Super Saver said...

FIRE Finance,

Thanks for including this post in your favorites.