Key Takeaway: Wondering how much to save for college? To know where to start, it’s important to understand the typical costs of college and how inflation plays a part. This article outlines average tuition costs for the 2023-24 school year and discusses several savings vehicles—529 plans*, Coverdell ESAs, and traditional savings accounts. It will also show you how you can use college cost calculators to estimate expenses and adjust your savings plan as needed. It’s never too late to start saving, and every contribution counts!
“How much should you save for college?” is the million-dollar question, and one that can create a lot of stress for families. When do you start saving, is it too late, and what are your options? We’re answering some of the most common questions people have when trying to figure out how much to save.
Understanding the Costs of College
How much you pay for college tuition will depend on the type of school (private for-profit, private nonprofit, public schools) and whether your child is attending in-state or out-of-state. Here’s a breakdown of the 2023-24 school year’s average tuition and fees:
- Private Nonprofit: $38,421
- Private For-Profit: $15,868
- Public In-State: $9,750
- Public Out-of-State Schools: $28,386
Inflation and Its Impact on Future Costs
From 2010 to 2022, the cost of tuition at public 4-year colleges has increased 9.24%. With these rising costs, it’s likely this trend will continue by the time your child is ready for college. This is why it’s important to factor inflation into your savings plan for their future education. This can be done by investing your savings in an investment account that accommodates inflation.
Use College Cost Calculators
When thinking about how much to save for college, it’s best to have an end goal in mind and make a plan to get to that goal. It’s a lot of math to figure out—we get it! This is why using a college cost calculator can help you. Start by selecting a four-year or two-year in or out-of-state college, private or public. You can then insert college increase rate, attendance duration, percent of savings, the amount you’ve saved so far, return rate, tax rate, and how many years college will start in. This can help you determine rough estimates of what to expect from college costs and how much you should set aside each month.
When you sign up for a FREE College Raptor account, you can not only estimate the cost of the colleges on your list, but the tool will show you how likely you are to be accepted into the school based on your GPA and test scores. And, it will show you which of the colleges on your list are the most affordable to you based on grants and scholarships you are eligible for.
How Much Should You Save: Setting Goals
It can be challenging to start a college fund when you’re paying for childcare, bills, and other living expenses. Plus, it’s hard to know exactly how much you should be saving. But the earlier you can start, the better. That doesn’t mean you have to start big—just start. Think about how much you can afford, whether it’s $50 a month or $250. Something is better than nothing.
So, when it comes to setting goals, take a deep breath. You don’t have to save the full cost. A good rule to follow is saving 1/3 of a four-year program’s tuition and fees. For example, if a four-year program is $55,000, you’ll need to save roughly $18,333. Even if you start when your child is 10, you’ll only need to save around $200 a month. Not too bad right? The idea is that if you save one-third, then the remaining two-thirds could be filled in by loans, scholarships, financial aid, and current income (whether that’s your income or your student’s money from a job or work-study).
Invest Your Savings With a Savings Plan
Here are several ways to save for college. Choose the option that works best for your risk tolerance and saving goals:
1. A 529 College Savings Plan
A 529 college savings plan* is a state-sponsored investment plan that helps you save money for education expenses. Your contributions can grow without being taxed and your withdrawals aren’t taxed if used for qualified education expenses, typically tuition, room and board, and books. One of their key benefits is that because they offer tax-free growth, you could potentially contribute less money each month compared to a regular savings account to reach your savings goal. Additionally, a 529 plan is considered a parent asset, which means it counts less in the financial aid formula. This could potentially increase your eligibility for financial aid.
2. Coverdell ESA
A Coverdell Education Savings Account (ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses. To open an account, the beneficiary must be under 18 and the funds must be given by the time they reach the age of 30. Coverdell ESAs are similar to 529 plans but tend to offer more flexibility in investment options and have a lower annual contribution limit ($2,000). Coverdell ESA funds can also be used tax-free for qualified education expenses.
3. Traditional Savings Account
A traditional savings account is offered by banks and credit unions and could allow you to deposit money, earn interest, and withdraw funds when needed. If you’re new to saving or prefer a risk-averse approach, a traditional savings account is familiar and convenient. If you need funds quickly, the money is more easily available. While they may not offer the highest returns, they can still be a solid foundation for starting college savings.
Adjust Your Plan Over Time
The best savings goal is the one that you can stick to. However, life isn’t always predictable and there may be times you need to review and update savings goals. Perhaps there is a season where you can save more per month. There may also be seasons with higher bills and unexpected costs. In this case, you may have to scale back.
You can also ask the important people in your child’s life if they are willing to help on certain occasions (birthdays, graduations, holidays). Even small gifts can add up in their college fund. Remember, it’s okay to make changes—that’s life. Your child will appreciate whatever you’ve been able to save, no matter the amount!
Ways Students Can Help Reduce College Costs
Don’t let the stress of paying for college fall completely on you. There are a lot of opportunities out there that your child can take advantage of to help reduce how much you’ll need to pay out of pocket:
- Complete the Free Application for Federal Student Aid (FAFSA): Regardless of your financial situation, every student should fill out the FAFSA form to see if they are eligible for scholarships, grants, student loans, and work-study programs.
- Apply for Scholarships: Encourage your child to apply for as many scholarships as they possibly can. After all, it’s free money** that you don’t have to pay back! College Raptor has thousands you can search for. Keep in mind that while scholarships don’t need to be repaid, they may come with other obligations.
- Encourage AP Classes: High school students can take Advanced Placement (AP) courses to potentially earn college credit by passing the exams. If this option suits your child, encourage them to take a few AP courses to reduce the number of classes they’ll need to take in college.
- Get a Part-Time Job: If possible, encourage your child to get a part-time job. The income they make can be used to help cover college expenses such as tuition, books, dorm living, and food.
The thought of paying for college can be overwhelming and stressful for many families, especially with the rising costs. Despite these high costs, there are options that can help make the process less daunting. Start by setting goals—how much can you realistically save for your child’s education? Then, take action! Early planning and consistent contributions can make a huge difference. It’s never too late to start saving because any amount set aside can have a meaningful impact!
Create a college savings plan today, or never hesitate to reach out to your financial advisor to talk and learn more about your options.
Disclosures:
*Citizens Wealth Management (in certain instances DBA Citizens Private Wealth) is a division of Citizens Bank, N.A. (“Citizens”). Securities, insurance, brokerage services, and investment advisory services offered by Citizens Securities, Inc. (“CSI”), a registered broker-dealer and SEC registered investment adviser – Member FINRA/SIPC. Investment advisory services may also be offered by Clarfeld Financial Advisors, LLC (“CFA”), an SEC registered investment adviser, or by unaffiliated members of FINRA and SIPC providing brokerage and custody services to CFA clients (see Form ADV for details). Insurance products may also be offered by Estate Preservation Services, LLC (“EPS”) or an unaffiliated party. CSI, CFA and EPS are affiliates of Citizens. Banking products and trust services offered by Citizens.
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** While a scholarship does not have to be repaid, there may be other obligations associated with the scholarship.
