How Much to Save for College

Deciding how much to save for college can be challenging, given that college costs increase faster than the consumer inflation rate. Parents may be overwhelmed by how much college will cost when their children are ready to enroll, in the same ballpark as a home mortgage. But, families do not need to save the full cost of a college education. Actual college savings goals can be more realistic and affordable. There are also ways to make it easier to save for college.

Sticker Shock

Parents of newborn children may get sticker shock when they consider the likely cost of their children’s college education. College costs increase by about a factor of three from birth to matriculation. A child’s college education will cost four to eight times as much as the parent’s college education. Tuition inflation is about twice the Consumer Price Index (CPI-U).

For example, if current costs increase at the same rate as they have increased since 1995, students enrolling as freshmen in 2030 will face a total 4-year undergraduate cost of attendance that is about $125,000 at in-state public 4-year colleges and about $370,000 at private non-profit 4-year colleges. The cost of attendance at the highest cost private non-profit colleges could be as much as $675,000.

This table shows projections of future college costs for each $10,000 in current college costs based on various inflation rates and various number of years until the child enrolls in college.

Tuition Inflation Rate 4 Years 8 Years 12 Years 17 Years 26 Years 31 Years
3% $11,255 $12,668 $14,258 $16,528 $21,566 $25,001
4% $11,699 $13,686 $16,010 $19,479 $27,725 $33,731
5% $12,155 $14,775 $17,959 $22,920 $35,557 $45,380
6% $12,625 $15,938 $20,122 $26,928 $45,494 $60,881
7% $13,108 $17,182 $22,522 $31,588 $58,074 $81,451
8% $13,605 $18,509 $25,182 $37,000 $73,964 $108,677
9% $14,166 $19,926 $28,127 $43,276 $93,992 $144,618

The idea of saving this much money may seem impossible for most parents. But most students will enroll at in-state public colleges, which are much less expensive. These figures do not consider the possibility that financial aid will discount the sticker price to a more affordable net price. Parents have 17 years to save for college (more, if they start saving before the baby is born). To put these figures in perspective, note that the average income tends to double over a 17-year period, so the college costs will be more affordable than comparisons with current income might suggest.

Setting Realistic College Savings Goals

Parents do not have to save the full amount. Like any life-cycle event, the cost of a child’s college education will be spread out over time. About a third of the costs at the time will come from past income, in the form of savings or the net worth of accumulated assets, about a third will come from current income and gift aid (or, alternately, one-third of the net price will come from current income), and about a third will come from future income, in the form of loans. This principle, which suggests that parents need to save only about a third of future college costs, is known as the One-Third Rule.

As noted above, college costs increase by about a factor of three over any 17-year period. When combined with the One-Third Rule, this suggests that parents should set their college savings goals based on the full cost of a college education the year the child was born. Most parents cannot accurately predict where their children will enroll 17 years in the future. However, they may be able to predict the type of college, such as an in-state public college, out-of-state public college or private non-profit college. Assuming that the parents are saving for college in an age-based asset allocation in a low-fee 529 college savings plan, this table shows how much they should save per month from birth.

Type of College Monthly Savings from Birth
Public 4-Year College (In-State) $250
Public 4-Year College (Out-of-State) $400
Private Non-Profit 4-Year College $500

Other rules of thumb for setting college savings goals include:

  • Saving at least 10 percent of gross income per child from birth
  • Discretionary Income: Discretionary income is the amount by which the borrower’s adjusted gross income (AGI) exceeds a minimal standard of living, such as the amount by which the borrower’s AGI exceeds 150 percent of the poverty line.
  • Saving at least 15 percent of discretionary income per child from birth
  • Saving at least $3,000 per year per child
  • Saving 15 percent of one-year college costs the year the child was born per child per year from birth

Savings Plan Growth

This table shows how much money will be accumulated by saving $100 per month at a particular average interest rate for a given number of years. For other monthly contribution amounts, adjust the cumulative savings proportionately or use the more complete list of savings plan growth tables.

Interest Rate 4 Years 8 Years 12 Years 17 Years 26 Years 31 Years
1% $4,899 $9,998 $15,306 $22,245 $35,644 $43,626
2% $5,001 $10,419 $16,287 $24,313 $40,946 $51,546
3% $5,106 $10,862 $17,351 $26,636 $47,292 $61,416
4% $5,213 $11,329 $18,505 $29,247 $54,912 $73,700
5% $5,324 $11,823 $19,758 $32,186 $64,092 $89,081
6% $5,437 $12,344 $21,120 $35,500 $75,181 $108,420
7% $5,553 $12,895 $22,601 $39,240 $88,616 $132,826
8% $5,673 $13,476 $24,211 $43,468 $104,936 $163,735
9% $5,795 $14,091 $25,974 $48,251 $124,809 $202,010
10% $5,921 $14,740 $27,874 $53,670 $149,066 $253,067

Determining the Monthly Contribution

This table shows how much money must be saved per month to accumulate $100,000 at a particular average interest rate for a given number of years. For other college savings goals, adjust the monthly contribution proportionately. For example, suppose a parent begins saving for college when their child is born and wants to save a total of $75,000 by the time the child enrolls in college 17 years later. If the parent expects to earn an average 5% return on investment, he or she would have to save $310.69 per month to accumulate $100,000. Since $75,000 is 75% of this amount, multiply $310.69 by 75% to yield $233.02 as the amount he or she needs to save per month.

Interest Rate 4 Years 8 Years 12 Years 17 Years 26 Years 31 Years
1% $2,041.11 $1,000.16 $653.36 $449.54 $280.55 $229.22
2% $1,999.51 $959.82 $613.99 $411.29 $244.22 $193.93
3% $1,958.54 $920.66 $576.35 $375.44 $211.45 $162.82
4% $1,918.18 $882.65 $540.39 $341.92 $182.11 $135.69
5% $1,878.44 $845.80 $506.11 $310.69 $156.03 $112.26
6% $1,839.31 $810.09 $473.48 $281.69 $133.01 $92.23
7% $1,800.79 $755.51 $442.47 $254.84 $112.85 $75.29
8% $1,762.87 $742.05 $413.03 $230.06 $95.30 $61.07
9% $1,725.56 $709.70 $385.14 $207.25 $80.12 $49.26
10% $1,688.85 $678.43 $358.76 $186.32 $67.08 $39.52

Notice how the amount saved per month increases with a shorter time horizon. If a parent begins saving for his or her child’s college education when the child enters high school, the parent would need to save six times as much per month as he or she would have to save per month from birth, assuming a 5% average annual interest rate.

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