Jan 18 2011

How much to save for your children’s college education?

Note: This is the first post in a series I’m running this week on saving for college.

When I fiddle with online calculators to determine how much I should be setting aside for my newborn and toddler to use for college, it makes my stomach drop.

This calculator on Smart Money thinks I should be saving $435 per month for the baby and $470 per month for the toddler. Gulp. Combined, that’s $905. That’s $145 more than my rent!

I assumed the default figures of 5% college inflation and 6% return on the investment. I also assumed they’ll be going to in-state public schools for 4 years.

This calculator at Saving For College has a few more values I can tweak.

I assumed a cheaper school — one more around $15k per year at today’s costs. It’s saying I need to do $336 monthly for Vivienne and $362 monthly for Jonathan. Yikes.

It’s impossible to know exactly how much the expenses will be 16-18+ years from now. We can’t know what true tuition costs will be, how much our investments can grow, and what sorts of scholarships the kids will be able to land. These calculators can only give us a vague idea of the kind of money we’ll need to scrape together.

In a more practical sense, I think it’s best for a family to save as much as they can reasonably afford.

Saving for college is Dave Ramsey’s baby step #5. To be at this step, Dave says you should have all of your debts paid, an emergency savings of 3-6 months of expenses, and be saving around 15% toward your retirement.

Once all those things have happened, he says it’s appropriate to start the college funds.

But part of our long-term financial plan for our family is to live in a house and pay it off in 15 years or less. Doing so will save us money in interest, and also having a paid-for house will free up extra funds for us to pay for education later. Ideally, we’ll be in that house within the next year or three.

So before we start saving as much as we can reasonably afford for college, we’re going to make sure we have enough for our down payment and closing costs. That’s our baby step #4B.

I’d still like to start savings plans for them and save a small amount each month until that happens, just to get it going.

Here’s my opinion on a few matters of priority. You may disagree:

  • If you have credit card debt, pay that off before saving for college.
  • If you have other debt — your own student loans, a car loan, whatever, consider paying that off before starting a college fund unless the debt is extremely low-interest and it will take you several years to pay off, even if you accelerate your debt payments. But paying off your own debts first is probably the best approach.
  • You really, really, really should be saving enough for your retirement before starting a college fund. Your kids can find other ways to advance their education (even if that means taking out a loan). You need to have the means to pay your bills in old age.
  • Don’t withdraw from your retirement plan to cover tuition.

Lastly, while I do hope we can put a big chunk of money aside for the kids for school, I don’t want it to come at the expense of their childhood. I want to have nice family vacations, for example. I want to be able to afford other worthwhile things during their little years. You know? There has to be a balance.

Once you look at your overall financial picture, decide how much you can put away each month, this year. Revisit that figure periodically and bump it up if you can, or reduce it if it’s causing some strain. If your standard of living is comfortable, you can put all extra found money (bonuses, pay increases, garage sale proceeds, etc.) into the college fund.

Automate your contributions and make them a regular part of your budget.

We might be able to surprise ourselves and save a lot more than we thought possible, but even if we don’t, saving something is better than not doing anything about it.



11 Responses to “How much to save for your children’s college education?”

  1. Even though we still have a bit left to pay on our car, quite a chunk on my student loans, and of course, that ridiculous mortgage (what were we thinking?!) we decided to open a college savings account for Darah a few weeks ago (she’s 17 months old). We saved up $500 to get it started, and we are contributing $50/month. Compared to what those calculators say we should be contributing, it is a paltry sum, but it is what we can do now. And we are also about to get aggressive on our car loan so we can pay it off this year. We used to be contributing quite nicely to our retirement, but we aren’t as much now (down 1 income). But still, I thought it was time to do something for her college, even if it wasn’t much. I know it will add up and we’ll be so glad we did it later.

    Parents have different views on this, but my husband and I do not feel that it is our responsibility to pay for the entire cost of college for our children. I totally understand why some people do think that, though. We do think we have a responsibility to help out, and we plan to be able to cover 1/3 of the cost. Perhaps more, but at least that much. We will also do what we can to help our children be competitive for scholarships and help them out with that process. But we think that an even better gift we can offer our kids is to cover our retirement expenses. That is a gift to ourselves, and to them in their middle age. Make sense?
    Tiffany´s last post ..Handstamped Jewelry You Will Adore GIVEAWAY!!!

  2. I have to admit, College funds for our children is probably the last thing on our list of things to save for right now. And until all our debt is paid off, we’re in a house and in a place where we’ve got lots of money It probably wont be a priority. I don’t really feel like it’s the parents responsibility to pay every penny of their child’s education. There’s always scholarships, working through college and loans if needed. I do want to be able to pay some, even if it’s just for the books, but I also want our children to understand the value of their education. I know a lot of parents feel otherwise, and that’s fine, this is just our view.

    Neither of us had everything handed to us, we had to work for things, and I must admit, I appreciated my parents for teaching me that not everything in life is easy or given to you. They also made sure to teach me not to go completely into debt, and that you don’t need the best of the best.

    Hopefully one day we will be able to afford to put some money aside for their college, but I’m not going to worry if we don’t have a ton!
    Jes´s last post ..Not Enough

  3. My parents saved basically nothing for my college education, as far as I know. I went to a relatively cheap private high school, but my folks made it clear that unless the scholarship fairy brought me a full-ride, my only option for college was a big in-state school. After scholarships, my tuition at IU turned out to be about the same as my mom had paid all through high school, so she continued to contribute that amount. I had a credit card, but I have always been taught to treat it like cash, earn the rewards, and never ever carry a balance. If some huge emergency came up that I had to put on my card (such as a major car repair), my folks thankfully were there to help me out and make sure I didn’t ever have to pay interest. I made it through undergrad debt-free with my parent’s occasional help on those kinds of living expenses while I worked to make my own spending money.

    Then, I went to law school. I no longer had time to work, but I had my own savings account that I had accumulated un-touched since birth. Most monetary gifts from family members beginning at age 0, all summer job earnings, and occasional odds and ends from my parents (like a small settlement from a car wreck I was in) went into that account. As a kid, I didn’t know the difference. As a teenager, it stunk to not be able to spend the money I was making or the gifts I was given, but my parents provided for me just as they always had, and now, I really appreciate how strict they were about it. By the time I was 21, I had a little more than $20,000 untapped. It paid for one year of law school and living expenses after scholarships. Then, I went into debt.

    My parents have since divorced, my mom moved out and bought a new house right before the economy tanked, and things have changed for them A LOT. Now that they are approaching retirement age, they are glad, I’m sure, to have their own savings and to not have gone into debt to pay for my education. So what if I have? I’m 23, my only debt consists of a few federal and one private (but very low interest) student loan, and I have approximately half a century before I have to worry about retiring. They made the right call, and I think you are making it too.

    P.S. Glad you’re posting again, and hope momhood x2 is going great!

  4. Rachel! Sorry to hear about your parent’s divorce :(.

    That is so good you were able to get through undergrad without debt, and pay for your first year of law school! I hope you will be able to pay off the rest quickly and get on with things. Something tells me that you’ll be just fine :)

  5. It’s nice if parents can contribute to their adult children’s higher education, but I am very against it if the parents aren’t taking good care of their own financial situation first. I work with a suprising number of people in their 50’s and 60’s that will NEVER be able to retire (unless they plan on retiring to a cardboard box under a bridge) because they believe their perfectly able bodied adult children and their education comes first.
    Trixie´s last post ..Substituting Mashed Cauliflower for Mashed Potatoes

  6. Neither of our parents contributed to our college costs, except for allowing us to pull out a loan in their name (we paid the loan though). While we both highly value college and would encourage our kids to go, neither of us feel that it’s our “duty” as parents to provide it. I’m with Jes – it’s probably the last thing I’d do. We have waaaay too many other things that are financially weighing us down, and frankly I don’t see our financial position changing before our kids leave the house. I would definitely do it if I had the extra money, but we don’t. It’s not all bad – I think for both of us, knowing that this wasn’t a “free ride” made us work harder to get as much out of our education as possible. (In my case, I worked hard to graduate early – and save that much money.)

  7. I don’t know if you were basing your numbers on 4 years of school, but when you start to consider scholarships I think it gets even harder to figure out what to save. My parents couldn’t have known that I would end up with a full ride for 2+ years, but they saved anyway. So while they tried to save a couple years worth of tuition each for my two sisters and me, their money went a lot further because of generous scholarships. They aren’t just for high school seniors either. A good college financial aid office will help students look for scholarships even while their sophomores, juniors, and seniors; it’s just a matter of putting in the time and effort to search them out. Who knows, maybe your oldest will get some awesome scholarships and in the process help extend your savings.
    Abby B´s last post ..Beginning of WEP

  8. My husband and I both funded college ourselves (with a healthy amount of student loans). Together we pay $150 a month to service this debt (locked in at 0.65%). A lot less than the $400 a month per kid everyone wants you to save. We have 3 kids and each get $50 a month into their college accounts. You have to balance all things and not forget the present just to prepare for the future.

    Right now our daughter goes to preschool, my son is in soccer, and my daughter takes dance. This adds up to more than the $150 they get in their college funds but its priceless in my opinion. My spouse and I never were in any activities and are sedentary. We are helping our kids to enjoy moving their bodies as well as helping our son control his emotions.

  9. Abby — that is great that you had a full ride for 2 years! I think if college savings exceeds the amount needed, that’s a good problem to have. With the 529s I can easily transfer our funds among my children or other family members. If we get the kids through school and still have money in the 529s for them, I would be thrilled that we would be in the position to cash them out, pay the penalty, and hand them a check. Or keep it for ourselves. :)

  10. WOW that is a lot of money they recommend you to save! I think as long as you’re doing something it’s better than nothing. :)

  11. I think that’s a really good way to look at it–using common sense and NOT totally panicking. We can’t contribute to college savings right now. We got our van paid off, and now we are working on paying the midwife for the upcoming birth of baby #3. Then we need to put some money into emergency savings. We could probably contribute something close to those calculated figures had I wanted to keep working, but we decided it would be best for me to stay home with our kids, and that’s not something I’ll sacrifice.

    I truly don’t believe a free ride to college will *make* a person successful anyway. I don’t have stats, but I’ve seen people with a big nest egg totally blow it and drop out, and others who had to work their way through go on and get graduate degrees. Others get an inexpensive two-year degree and end up being happy and successful.

    Anyway, we’d like to help our kids as much as we can and as much as our budget allows. We are hoping that in five, ten years our situation will be different. My husband will be making more, and we eventually won’t have to worry about paying homebirth midwives out of pocket and things like that. Then we’ll be able to save more, and we will :-)

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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.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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