Paying for College: How Much to Save For Yourself or Your Child

Figuring out how much to save for college can be challenging. Today’s college costs can be as much as a mortgage. And seeing that six-figure number can be pure sticker shock.

Unfortunately, the cost of a degree continues to rise year after year, leaving families scrambling to figure out how to pay for college. When it comes to saving for college, the sooner you start, the more your savings can grow — and the less money you’ll have to borrow.

If you’re asking, “How much should I save for college?”, read on for steps to help figure out how much you should set aside, along with additional savings considerations.

A quick note on saving for college…

There are a number of factors that determine how much to save for college, including whether you’re saving a college fund for yourself or for your child.

If you’re saving for your own education before heading off to college, you’re likely working within a limited timeframe. The longer you delay starting or going back to school, the longer you’ll have to wait to start earning more money. This, in turn, can delay other personal and financial goals.

But if you’re saving for your child’s college fund, you might have more time to save and maximize the benefits of compounding interest.

How much should I save for my kid’s college?

If you’re saving for your child’s education, here’s the biggest piece of advice to keep in mind throughout your saving journey — and it comes courtesy of every pre-flight safety briefing:

Put on your own oxygen mask, first, before helping others.

If you’re drowning in debt or struggling to make ends meet, saving for your child’s college education shouldn’t be your first priority. As much as you might want to set your kids up for success and make their lives easier, you have to get your own financial house in order, first.

And this includes saving for retirement.

The truth is you or your child can borrow money for college, if necessary. But you can’t borrow money for retirement.

Prioritize your own finances by taking care of your immediate needs, paying off debt, and maximizing your retirement contributions. Then, you can focus on dedicating funds to your child’s educational needs.

How to figure out how much to save for college

There isn’t a one-size-fits-all dollar amount when it comes to saving for college. But that doesn’t mean you have to fly blind.

Start by exploring questions and scenarios, like:

• What percentage of the cost do you want to pay? If you’re considering covering the full cost of your child’s education, it can be an overwhelming number. Some parents choose to split the cost, so the child shoulders some of the financial responsibility and has more motivation to succeed in school.
• How much time do you have to save? If you start saving when your child is born, a nice chunk of your savings goal will come from interest earnings over time. However, if your child is about to graduate high school, you won’t have much time to earn interest. So, you’ll be relying on your recent contributions.
• How much can you afford to save? Sit down and create a realistic budget that includes each of your financial goals. Determine how much you can afford to save each month after paying bills and contributing to your retirement accounts.
• Will your family qualify for financial aid? When it’s time to apply for college, the Federal Application for Federal Student Aid (FAFSA) is used to determine your eligibility for federal financial aid (e.g. grants, work-study opportunities, etc.). But you can use other tools like the FAFSA4caster to get a rough understanding of what you might receive based on current eligibility requirements.

Related: How Single Parents Can Help Pay for Their Child’s College Education

All of these factors will influence your financial plan. You can further nail down an overall savings goal and monthly plan by following these general steps.

1. Estimate the future cost of attendance

Colleges are required to publish their annual cost of attendance (COA), which includes tuition, fees, room and board, and other education expenses.

These costs can dramatically vary among schools depending on whether it’s a public or private university — and whether you’ll be paying in-state versus out-of-state tuition.

If you have a specific college in mind, you can use its current COA as a starting point to estimate future college costs.

Or you can use a more generic number. College Board’s annual report for the 2020-2021 academic year breaks down the cost of tuition, fees, and room and board as follows:

• Four-year public college (in-state): $22,180
• Four-year public college (out-of-state): $38,640
• Four-year private nonprofit institution: $50,770

Once you’ve determined an annual COA, you can use an online calculator to estimate the future cost of college using factors like your child’s age and the expected inflation rate for college costs.

For example, let’s say your child, Max, is four years old. And you’re hoping Max will attend a university with an in-state tuition rate.

Using College Board’s college cost calculator, the projected cost of attendance for Max at a four-year public college with a 5% inflation rate is $189,279.

These total projected costs can serve as a guide for setting up your college savings goal.

2. Use the “One-Third Rule” to choose an end goal

The amount you’ll need to save depends heavily on how early you start saving. But, as a general rule of thumb, consider using the “One-Third Rule” to choose an end savings goal.

Financial experts, like CEO and Founder of CollegeBacker Jordan Lee, recommends targeting “one-third of the expected cost of college.”

This strategy uses a combination of funding source categories roughly split into thirds, including:

• College savings
• Scholarships and financial aid
• Current income (while your child is in school) or future income in the form of student loans

Using this rule of thumb, let’s say you’ve decided to save 35% of the projected total cost of attendance. If we use the previous example’s total COA of $189,279, you’d only need to save $66,248.

That’s a much less intimidating number. And it includes interest earnings, which means you won’t have to contribute the full amount on your own.

3. Set up monthly contributions

Once you’ve chosen an end savings goal, you can figure out how much you’ll need to set aside monthly to meet this goal.

Let’s use our same example of needing to save $66,248 to fund one-third of the projected college costs. If you earn an average rate of return of 6%, you’d need to set aside about $200 per month to reach your goal.

Contributing $200 a month is an easier pill to swallow than staring down the big-picture number.

And because you started saving early, a big chunk of your savings will come from compounding interest over time.

Where to save for college

You can use a number of investment tools to meet your savings goal. For example, a 529 college savings plan offers many benefits, including:

• Federal tax-free growth
• Tax-free withdrawals for qualified education expenses
• Additional state tax breaks, depending on where you live and which plan you invest in

You can even leverage the power of friends and family by using a 529 platform, like CollegeBacker. It allows you to easily invite others to chip into the college fund for special occasions or with monthly contributions.

These one-time or regular gifts, even as small as $25 a person, can add up over time and benefit your child long-term.

Alternative ways to pay for college

If there’s still a financial gap after accounting for your savings and any financial aid opportunities, there are other ways to pay for college when the time comes.

Federal student loan opportunities are available to students and eligible parents. They have low interest rates, flexible repayment plans and loan forgiveness programs that can make borrowing more affordable.

There’s also the option of borrowing private student loans, but these should only be used as a last resort.