I am in favor of college students “having some skin in the game” in sharing in the cost of their education, but many graduates are leaving colleges with crippling student debt today. For parents and grandparents, it’s never too early to start saving for this investment in your child’s future. As part of my education planning for clients, I use specific colleges to estimate how much a future college education may cost and to suggest how much to save monthly. Ready for some sticker shock?
Example 1: Max is 6 years old and his parents hope he will attend their alma mater, Texas A&M. Today, in-state costs (tuition, room/board, books and fees) are $19,702. The projected costs when Max goes to school will be $117,520 for four years. To save this amount, invest $454 a month, starting immediately.
Example 2: Carla is 3 years old and her parents would like for her to be able to attend a private university, such as Southern Methodist University. Today’s annual cost is $61,385. Projected future expense: $400,105. Invest $1,164 a month.
Assumptions
- Student attends college for 4 years at age 18. Of course, many take more than four years, especially if they change majors or decide to pursue graduate studies.
- These calculations assume 3% inflation. In recent decades, college costs have increased by 5-6%. Hopefully, these increases will moderate as overall inflation is currently quite low.
- We are assuming a 6% rate of return on the investments, and tax-free withdrawals from a 529 Plan. Although this is a fairly conservative assumption, it is, of course, not guaranteed.
We can adjust these assumptions, which will change the estimated costs and savings requirements. The calculator gives us a ballpark idea of just how significant an expense it is to send a child to college today, let alone two or three kids. Typically, we run a couple of scenarios to give a range of possible costs for parents.
A 529 College Savings Plan is a great tool for this job. Withdrawals from a 529 are tax-free when used for qualified higher educational expenses. There is no expiration on funds in a 529 and the account owner can change the beneficiary of the account, if one child does not need all the funds. The biggest benefit of a 529 is the tax-free growth, which means that we want to start a 529 as soon as possible for a child to receive many years of compounding. Once they’re 16 or 17, it’s too late to receive much of a tax benefit.
Link: 8 Questions Grandparents Ask About 529 Plans
Want to estimate how much it will cost for your child or grandchild to get the same college education you received, or wish you had received? Send me the details and I’ll get back to you with an estimate. If you’re ready to add college savings to your overall financial plan, I am here to help!
