Mar 02 2009

How much to save for a baby’s college education?

In recent years, college expenses have increased at 6 to 7 percent annually — a rate that far exceeds the rate of inflation. I really don’t understand why. I hope that this rate doesn’t continue indefinitely, because if that’s the case, about eight people will be able to afford to go to college in the future.

I hope that once we pay off our car, we’ll be able to start a college savings fund for our baby. But how much should we save?

Even if parents can afford it, I don’t think they should pay for 100 percent of their child’s college expenses.

A student will do better in the classroom and in life if he has to pay at least some of his way through. He’ll be more likely to try to cut costs (maybe he’ll decide to be an RA, or shop Amazon.com for cheaper books than can be found in the bookstore, for example). He might be more likely to go to class and put forth more of an effort if he’s paying some of the bill.

I realize that the earning potential of an 18-22 year-old is extremely limited. But still, they should contribute whatever they can to their schooling and living expenses.

So how much might college cost in 18 or so years, when little Johnny goes to college?

Some calculators estimate it will cost $175k to $200k to send him to an in-state public four-year school. I truly hope it doesn’t come out to be that much.

I fiddled with this calculator, and if we want to pay for 100 percent of his education, we’d need to save $375/month starting now. And that’s assuming we’re able to get a 7 percent return on our investment. Our investment could lose value, too.

If he wants to go to a private school, we’d have to sock away $870 per month. That is $100 more than my rent!

I’m sorry, but $375/month is just not realistic for us right now. We could possibly swing it, but that would mean we’d be life-long renters. That would be a problem during retirement.

I’m not yet sure how much we’ll be able to set aside. I’m hoping that with time, we’ll be able to increase our contributions.

I’m hoping that we’ll be able to cover at least 50 percent of his costs. I’d likely expect Jonathan to cover at least 20 percent of his expenses through summer and part-time jobs. Maybe the rest can be covered by scholarships, and finally, student loans.

How much are you planning to contribute to your child’s education?



19 Responses to “How much to save for a baby’s college education?”

  1. It’s a touchy subject. My parents set aside $100 a month from 8th grade on – it didn’t pay for much, but it was a great help, and also an incentive to apply for lots of scholarships!

    I went to a private college, and was the only person in my group of friends paying for part of the tab. I was also the only person not partying on Thursday and Friday night. :-) But you know this, you’re young too! Working part-time through college really helped me to fine-tune my time management and financial skills.

  2. Paul and I both feel strongly about not paying for 100% of our kids’ college. We don’t know how much we’re going to save for them, though. We’d prefer to put our money towards retirement and a house right now, and we’ll figure it out when we have leftover money! We both paid 100% of college (after scholarships and grants, etc.) and both of us went to Christian college. While it would be nice to be loan-free right now (and sometimes I get really jealous of my friends who are), I wouldn’t go back and change it. (Neither of our parents could have afforded to send us to college, and both of us think the experience at our college was worth the loans.)

    One thought is, having money saved up for college education might hurt Johnny’s ability to get financial aid. I’ve seen kids whose parents have assets struggle to afford college. When my parents sold their house in 1987, they put it in a CD until they were ready to buy another house when we returned to the States in 2001. That money hurt me when I went to college in 2001. I was able to get better funding in subsequent years, and because I was paying my own way I made sure to try and graduate early to save money. :-) Sometimes it’s an all-or-nothing type of deal. I guess you have to figure out what is the happy balancing point where you are able to help your kid without hurting him.

    Also, if college costs $200k in the future for in-state tuition, I bet being college-educated will quickly stop being a “norm” and it will be easier to get a job without one.

    ashley @ twentysixcats’s last blog post..me right now

  3. I have several comments I find relative to this discussion:

    1. I am a current college student and I definitely agree that working during college years adds a lot to the respect you hold for the money that is being spent on tuition. I have worked full-time since my first semster, and I have attended school full-time. I did not fail my first semster, as many of my peers did. I, like Stacey, did not party every weekend. Because I always had to be at work at 8am, it just wasn’t an option. I could tell the students who were not paying for their education because they wouldn’t try as hard since it didn’t matter to them if they had to repeat a class.

    2. My parents have paid for all of my education so far, but this policy came with several strong guidelines. I have to attend classes and make decent grades. As a result, I have only received about 5 B’s and I am in my 8th semster, everything esle has been A’s. If my grades slip, I will have no funding and be forced to pay for it myself.

    3. When my parents were your age, they did not have a penny to put towards college funding. It has only been in recent years that they have become financially able to pay that amount of money. It is unlikely that you and your husband will have the exact same income in 18 years that you have right now. Save what you can reasonably handle, and trust that the rest will come when needed. Also, it is understood that if their income changes for some reason I will likely have to pay for the rest of my education. However, since I have savings (from working and living at home)that would be possible.

    4. There are ways to cut costs signifigantly. As you have said there are cheaper ways to get your textbooks. Also, I started out at a community college. It made tuition about $2500 less for the first four semsters. I live at home and have all through college. Some people don’t like the thought of it, but I have been able to save because I don’t have living expenses so when I move out after graduation I will have an emergency fund, a down payment for a house, and no debt. My parents can be annoying, but not enough to put my financial future in stress.

    When the time comes to send little Johnny to go to college, he will probably appreciate every penny you could put into his account and won’t be upset if there isn’t enough to pay for all of his education. I think that having your children pay part is probably the best situation for most families. I know a lot of students that would have done better if their parents had made them put up a portion of the money. Good luck with deciding on the portion you feel good about!

  4. My daughter is 17 and we are just now looking at all of our options. She wants to go to EIU but its $16000 a year. She is a hard worker, in sports year round and gets good grades. I would love to give her the world but it’s not in our budget. It looks as if she will be going to a JR college for 2 years and then 2 years at EIU. It’s about $3000 a year for JR and we just upped our deductions and will get a refund big enough to cover it. And it looks like we have almost enough saved for 2 yrs at EIU. We don’t want her to start her adult life with debt but we aren’t willing to go under either. And after she gets out, her younger brother will start college. At least they won’t be in college at the same time.
    And our neighbor’s son, went to college for 3 semesters, dropped out and wasted $30000. If he had went to JR college, they would have lost only $4500. I told him he’s lucky to be alive. This is far from a wealthy community and that money would of paid off a huge chuck of this parent’s house.
    I think that saving $100 a month is perfect. They need to take some responsibility for themselves. And it sounds like he will have a wonderful upbringing. Good Luck!

    SonyaAnn’s last blog post..DQ!

  5. I put $50/per month into an RESP. The Canadian government matches 20% of my contributions. (There’s a cap, but it was 20% of $2,000 annually when I opened it in 2003, with a lifetime contribution limit of $50,000 and I’m not sure if it’s been raised since. If I ever get to the point of contributing $2,000 per year I’ll check into it again.)

    If you pull your money out or your kid doesn’t go on to higher education you just get back your principal (the 20% goes back to the government) and the interest earned goes into a fund that the rest of the people then share.

    If we were farther away from retirement I might put more in the RESP but we’ve only got 15 years left (basically, we retire a couple of years after she graduates high school). Funding your child’s education at the expense of your ability to survive retirement is a poor idea.

  6. I partly worked & funded my own education and took it more seriously than the one year my parents funded. But with 4 kids, I’ve taken a different path. By choosing Pitt as my employer the kids can go there for free or choose one of their tuition exchange partners. Combine that and the Pittsburgh Promise ($10,000 a year per kid) and I don’t feel like I need to do more. The income and job now are as good/better than I could get at a non collegiate employer and it only takes 6 months of work before you can start using the tuition benefits. If my kids don’t want to choose from those options, then I wish them well and they’re welcome to live at home during their studies!

    Elizabeth’s last blog post..10 Things for which I’m Thankful

  7. Great comments, everyone!

    @Ashley — It does stink that by having more savings, you might not get financial aid. I didn’t qualify for aid because my mom made too much. It would have been nice to have, though!

    And, I’m hoping that college costs won’t continue to increase at their ridiculous pace. The bubble will burst on that eventually.

    @Megan — Way to go! You sound like you’re quite responsible. You aren’t going to regret your frugal ways.

    @SonyaAnn — Starting off at a community college is a wonderful way to ease into it, and to save a ton of money. It isn’t as glamorous as starting off at a 4-year school, but so what? At least it’s more affordable.

    My son very well might take that track when he’s older.

    @Shevy — You’re so right –funding a child’s education at the expense of the parent’s retirement is a lousy move. The student can find lots of ways to cut costs, and take out loans if he absolutely has to. Not so with retirement.

    We’ll be funding our retirement first, and contributing to college savings if and only if we can afford to.

    @Elizabeth — That’s a brilliant idea! Maybe on down the road I’ll also work at a university to get that tuition break.

    I have no idea if we’ll still be in Pittsburgh 18 years from now, and it’s hard telling if the Pittsburgh Promise program will still be in place. We don’t live in city limits, so we’d have to move to be eligible. It sounds like a great program to help kids and their families.

  8. We’ve been thinking about this as well. My husband and I both had our college expenses paid for by our parents, but we did get scholarships. Mine was the Life Scholarship (I’m in SC) and Jordan was a football manager and worked his butt off for $1000 a semester or thereabouts. I did work part-time in college for a while, but that was mostly to pay for my clothes, Christmas shopping, groceries–stuff like that.

    I know some people aren’t like this, but I took my education very seriously even though my parents didn’t trouble me with any of the bill. I graduated on time, summa cum laude in the honors college. Then I found a job.

    I would like to fund a college education for all of my kids, but I’m just not sure how it’ll happen yet. I want to stay at home with my children, and we don’t want to limit the number of kids we have just because the price of a college education is getting jacked up so high.

    I have a friend with three siblings whose parents basically told him there was no way they could afford to pay for all of them to go to college, and that they had better figure out a way to fund most of it themselves. A couple of them were studious enough to be offered full scholarships to in-state schools. My friend decided he’d rather go to a much more expensive place in a different state. He worked several jobs he hated and his grades dipped below his normal standard (of straight A’s), but eventually he graduated and went on to get his masters. All four of those kids, as far as I know, worked it out and are productive members of society.

    It makes me feel better to think about that family, because while I am grateful for the debt-free life that my parents have given me, I know that if we can’t pay 100% of our children’s college, they still won’t be locked into a life of poverty. The hard work and initiative it takes to get scholarships and earn money at a job is good preparation for college, anyway.

  9. I have no intention of paying for all or even most of my child’s college. I worked full time, got one small scholarship, and paid my way. I took it way more seriously than my brother who ended up dropping out with $45k in debt (some of which my mom co-signed for him and is on the hook for).

    If my kid wants to go that badly they can work, join the military, or start at Jr College and work.

    megscole64’s last blog post..Slowing Down, but Not Out

  10. My wife and I have ESA’s for both of our kids. The amounts we are currently investing will in not come close covering 100% of their tuition bills, but it will provide a good start. If in the future we can sock more into these accounts then we will.

    I worked my way thru college and graduate school, so I know it can be done. That being said, I will contribute as much as possible to their education.

    Adam’s last blog post..Money Folders 1.5.0.10

  11. Ah, this is a topic I’ve gone round and round on. We haven’t decided how much we’ll contribute – it will really depend on what we can comfortably afford. If we can afford to pay for their entire education, we will – we both benefited from generous parents and turned out fine :) I agree that the numbers are staggering. I estimated that if the kids went to a private university, they’d need $400,000 each for tuition, room and board. (They’re ages 4 and 2 now.) For the time being, we are saving what we can. Of course, their Coverdells, which I started when they were born, are down nearly 50% – ugh!

  12. We plan to help him with his housing and food expenses. He will be responsible (through scholarships, grants, loans or a job) for his tuition. My husband and I both had part-time jobs during college to help with “fun” on top of our scholarships. I had modest student loans as well (but I’d redo that, since I didn’t technically need them). I graduated summa and he graduated magna. It is possible to get a good education, have some fun and keep good grades.

    We both knew we would need to get scholarships, since our parents wouldn’t be able to pay for everything. It taught us quite a lot about hard work, and taking responsibility. We both had some help from our parents in terms of housing, and we thought that was a good compromise to strike with our son. So we are setting a little aside every month to help pay for his housing down the road.

    Miranda’s last blog post..Yielding Wealth Looking for Guest Posters

  13. Even if I could afford it, I wouldn’t pay for my future kids’ education.

    I’d pay 25% or 50% maximum, for each child, and until upon graduation, would I assess whether they deserve the rest of the 100% or not.

    I don’t know, I still have to work this out in my head, because I don’t want to compromise my retirement but I also don’t want my kids to struggle the way I did when I left school.

    Great topic for though. $375 eh?.. Wow. Imagine if you have 3 kids, that’s almost a grand for REGULAR schooling.

    Fabulously Broke’s last blog post..Think you’re in a career rut?

  14. By the time our children were old enough for college it was clear we could afford to send them anywhere they wanted to go and still foot the entire bill. Yes, we were blessed. It also was a fact in our home to not spoil the children as they were growing up and due to this fact they were all very independent by the time it came time for college. The formula I followed was this. First they all got scholarships, they all applied for the FAFSA and they all applied to be resident leaders for free room. I took one year cost at their school divided it by 3 (the number of children we have) That is the amount we set aside to help them out each year. The oldest went over and ended up signing a loan with us. The middle child was under and had a bonus upon graduation to get set up in an apartment. The youngest came out almmost even to the dollar. When asked later if they felt they had enough, the answer all three gave is that they were given more than enough. Including the child whose spending went over and now repays the loan with intrest.

  15. In addition. You can borrow money for a child’s college education, it is almost impossible to borrow that same amount for you and your spouses retirement. Every dollar you spend during working years not saved towards retirement is one less you will have to live on when income stops. (Just a thought)

  16. This is a tough one, because you also have to decide if you have an extra dollar, would you put it towards retirement savings or college fund. Would you rather pay their way through school, but be a financial burden later because you didn’t save enough? I think the scales are tipped towards savings as much as you need for retirement and then if you have extra put some away to help out for college.

    Let me tell you, with two kids, one age 8 and one age 6, the little we set aside each month for their education is a big chunk of money!

    Jorge’s last blog post..Independent Minded

  17. I found a cool new way people are saving for their children’s college as soon as they are born by asking friends and family to donate. It’s called College Registry from FiPath http://collegeregistry.fipath.com/home

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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