Remember, a college education is in investment in the future of your children. It is the best investment you can make. For example, CollegeBoard reports that an individual with a bachelor’s degree earns 66% more over a 40-year working life than someone with only a high school diploma.
You should save as much as you can, even if it is only $25 or $50 a month, and you should start saving as soon as you can. Put the power of time to work for you.
The sooner you start saving, the more time there'll be for compound interest to build up a nice college fund for your children. A family that starts saving $10 a week at birth at 4% interest will accumulate $12,663.44 by the time the child turns 17 and enrolls in college. If the family waits until 4 years before college to start saving, they'll have to save $56.12 a week in order to reach the same goal. If the family waits until the year before college to start saving, they'll have to save $238.60 a week to reach the same goal. Note that the family that starts saving at birth gets 30% of their saving goal from interest compounding, while the families that starts saving when the child enters high school gets a little less than 8% of their savings goal from interest. Time is your most precious asset; don't squander it.
The best time to start saving is at birth. But if you haven't started saving yet, the best time to start is right now. It is never too late to start saving.
How Much to Save
When parents first start trying to decide how much to save, they often get overwhelmed by the cost of a college education. Four years of college for their children will cost four to seven times as much as their own education cost their parents. Even in constant dollars that's two to four times as much. For a child born today, their college education will probably cost three to four times as much as it costs today.
In addition, you don't need to save the full amount. A good rule of thumb is the one-third rule. This rule states that you should expect to save one third of the expected college costs, pay one third from current income and financial aid during the college years, and borrow one third using a combination of parent and student loans. Effectively, one third will be coming from past income (savings), one third from current income, and one third from future income (loans), letting you spread the cost of a college education over an extended period of time.
Given that long-term tuition inflation is 8%, children born today will pay at least three times current college costs by the time they matriculate. Combining this with the one-third rule, it follows that parents of a newborn should use current college prices as a goal for their college savings. In other words, set the savings goal based on college costs in the year the child was born.
Other Rules of Thumb
Besides the one-third rule, a few other good rules of thumb for deciding how much to save are as follows:
Try to avoid being overwhelmed by the numbers. Save whatever you can, even if it is just $25 to $50 a month. The difficult part is getting started. Once you start saving, you will find it easier to increase the amount you save later. The more you can save, the better off you'll be. Saving just $25 a week from birth to age 17 at 5% interest will yield $34,839.45, a nice college fund.
The following table shows the results of saving different amounts per week at different interest rates and various numbers of years to enrollment. The first three columns correspond to a family that begins saving when the child enters high school. The last three columns correspond to a family that begins saving when their baby is born.
The following table shows how much you'd need to save per week in order to reach various savings goals at 8% interest at different numbers of years to enrollment.
If you'd like to see the results of different savings plans, FinAid includes several interactive calculators to help you.
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