The ever-rising cost of college shows no sign of abating. According to the nonprofit College Board, tuition and fees for the 2010-2011 academic year at four-year public colleges increased on average by 7.9% from the previous year, to $7,605, for in-state students, and by 4.6%, to $8,535, for those from out of state. For private colleges, tuition and fees jumped an average of 4.5%, to $27,293. And that’s not counting room and board, books, supplies, and transportation, which together may add more than $10,000 to the yearly total. At many top private schools, the annual cost now runs more than $50,000.
So how much savings will it take for you to send your children to college when they’re ready? Your expense will vary depending on what schools your kids attend, how much savings you’ve already set aside, any financial aid you get, and the rate of inflation for tuition prices. Still, you can get a rough idea of how much you need to save by plugging a few key assumptions into an online calculator.
Consider John and Jane Smith. The Smiths have two children, Michael, age 13, and Susan, who’s eight. The kids are five and 10 years, respectively, from when they’ll start college. Let’s begin by assuming John and Jane haven’t saved anything yet. Based on a current tuition cost of $15,000, a conservative expected interest rate of 3% and an expected inflation rate of 3%, in five years the cost of four years of college for Michael will be $72,749.55. To have that much set aside when he starts his freshman year, the Smiths would need to save $708.47 each month. Using the same assumptions, Susan’s four-year tuition bill will come to $84,336.67—and require an additional $465.24 in monthly savings. (Keep in mind that this is for tuition only; the actual costs of sending the kids off to college will be substantially higher.)
Now let’s change the scenario slightly. Suppose the Smiths have already managed to set aside $50,000 for each child. Using the same $15,000 annual tuition cost, the 3% expected return on their savings, and 3% inflation, the additional monthly savings needed to meet Michael’s tuition costs drops to $116.53, and just $75.74 more each month would get Susan to her goal.
Suppose we change another variable. This time, we’ll still assume the Smiths have saved $50,000 for each child, but now they anticipate that the children will be attending schools where tuition is currently $20,000, instead of $15,000. We will also keep the same 3% expected interest rate for their savings and 3% annual inflation. In this case, the overall savings goal for Michael to attend school for four years increases to $96,999.41, and the Smiths will have to save $352.68 per month to have that much ready when he starts college. For Susan, the savings goal increases to $112,448.90—or $230.82 a month during the 10 years until she reaches college age.
Finally, let’s change the facts one last time. We will keep a $20,000 tuition fee, $50,000 of college savings per child, and an expected 3% inflation rate, but we’ll double the expected interest rate from 3% to 6%. With this higher investment return, the projected savings goal to send Michael to school for four years can be achieved with monthly savings of $208.54. The goal for Susan, who will enter college in 10 years, is reduced to just $60.37.
Of course, these figures are hypothetical and not indicative of any particular investment. Be aware that investors also face the risk of lower returns and a loss of principal if markets decline. In addition, depending on how this money is saved, there may be tax consequences to liquidating investments to make the payments.
Keeping all of the variables in mind, you can see that making college savings a top priority is critical. You’ll also need to consider what savings vehicle to use. For many families, 529 college savings plans offer compelling advantages—you won’t be taxed on investment gains or when you pull out money to pay qualified college expenses, and some of these state-sponsored plans let state residents deduct contributions on their state tax returns. Financial aid formulas also tend to make smaller reductions in potential aid when savings are held in 529 plans. But other options may work better in some cases. And whatever vehicle you choose, the most important thing is to start saving as soon as possible and to be diligent about adding to your education accounts. With tuition costs likely to continue to rise faster than overall inflation, the high cost of college could move much higher in the years ahead.