How to Save for College

In some ways, saving for college is more difficult than saving for retirement. Even if you start early, you have only 18 years to work with, compared to a roughly 40-year career for retirement. In an industry with many options and unclear pricing, how do you cut through the noise and give your student their best shot at avoiding overwhelming student loan debt?

Set Your Expectations

Setting a goal is the first step in beginning your college funding journey. Figure out how much you want to provide for your child. Some parents aim to provide a set amount for each child, for example, $100,000 in future dollars, while other parents choose to link their goal to an institution, such as four years of in-state tuition at Indiana University-Bloomington. As you formulate your goal, keep in mind the different funding levels (25%, 50%, 100%, etc.) and expenses, such as tuition, room and board, books, and other fees.

All universities publish the cost of attendance online. This is the full sticker price without factoring in scholarships or financial aid. If your goal is indexed to a particular college, you can estimate the cost by the time your student enrolls. To calculate this, inflate the current attendance cost by the expected education inflation rate. Historically, college costs have risen by an average of 6-8% annually.

You'll create a solid benchmark by projecting today's costs over your time horizon and totaling the expenses across your student's college years. A simple time value of money calculation will determine how much you'll need to save each year to fund your goal.

For example, suppose the all-in cost of college at Indiana State University is $30,000 per year today, and your child will attend college from 2038 – 2041. In that case, the future cost will total just under $270,000 using an education inflation rate of 6%. Assuming an annual investment return of 8%, it will take monthly savings of $723 through 2041 to fully fund their degree.

Once you understand the cash flow needed to support your college funding goals, you can take realistic steps toward achieving them or adjusting your expectations.

College is expensive, and many families struggle to fully fund their college goals while maintaining their household budget and saving for other priorities like retirement. It's important to remember that students can borrow for college, but parents can't borrow for retirement. Lastly, reassess your college savings plan periodically as your student gets closer to enrollment.

Set Your Children's Expectations

Saving for college is only half the battle. It's just as important to have honest conversations with your children about the financial side of their education. Students need to be informed about the cost of college, how much you as a parent plan to provide, and the options for funding any potential gap. If loans are part of the plan, discuss repayment at different borrowing amounts, interest rates, and starting salaries.

This naturally leads to important conversations about the value of different degrees, the types of jobs available in their desired field, and the average salaries they can expect. Although it can be difficult for young students to make career decisions early, it can help them understand the real-world impact of different choices and will empower better decisions.

I recently met a college consultant who took an interesting strategy with her children. She saved enough to fund a 4-year degree at her state's flagship university. She told her children they could attend any school they chose, as long as it would leave them with no more than $10,000 in student loans. Her reasoning? The average monthly payment on a $10,000 loan financed over 10 years is around $100, a manageable amount regardless of career choice.

One of her children majored in ballet and was accepted into her dream school, but the price tag exceeded the family's parameters. Instead, she enrolled at a university that fit the budget. Upon graduation, she was able to repay her student loans while working as a waitress and dancing at a studio, earning a salary of $8,000 per year.

Conclusion

By setting clear expectations, both for yourself and for your children, you'll be better positioned to navigate the complex and often emotional journey of saving for college. With a strong plan and open communication, you can help your child launch into adulthood with fewer financial burdens and greater freedom.

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