A college degree is an investment that has a lasting impact. As a parent, you want to help your child succeed, but with skyrocketing college costs, covering education expenses can be difficult. If you’re planning on setting aside money for your child’s education and are wondering how much to save for college, consider that a year at a public four-year school is projected to cost $17,820 in 10 years — a 62% increase from today’s rates. While that cost can be intimidating, there are several different methods that can help you calculate how much money your family will need and develop a plan to meet that goal.
How Much Does College Cost?
When it comes to the cost of college, the biggest factor in determining the price is the type of school your child attends. According to The College Board’s Trends in College Pricing and Student Aid Report, these are the average annual tuition rates at the different types of schools as of 2022:
| Public Two-Year, In-District | Public Four-Year In-State | Public Four-Year, Out-of-State | Private Four-Year | For-Profit | |
| Tuition and Fees | $3,860 | $10,940 | $28,240 | $39,400 | $15,710 |
However, the cost of tuition and school fees are steadily rising. You can use Vanguard’s college savings calculator to see how much your child’s education may cost by the time they graduate from high school.
What Costs are Associated with College?
People often focus on the price of tuition when thinking about education expenses. But if you’re calculating how much to save for college, you need to consider other expenses that make up the total cost of attendance:
- Room and board: If your child wants to go to school away from home, you’ll need to budget for housing and meals. Whether your child opts for dorms and college meal plans or lives off campus and buys their own groceries, room, and board can add thousands to their overall cost. According to The College Board, room and board was between $9,610 and $14,030 for the 2022-2023 academic year.
- Textbooks and supplies: As of the 2022-2023 academic year, college textbooks, computers, and other supplies average $1,240 per year. While it’s possible to save money by renting books or buying secondhand versions, they are still a substantial expense.
- Transportation: If your child needs to commute to school or work, they will need reliable transportation. On average, transportation costs $1,250 per year for college students.
- Other expenses: Other expenses, such as student health insurance or clothing, add $2,200 per year to the overall cost.
When Should You Start Saving for College?
Your child’s college degree will be a substantial investment. Depending on the type of school they attend, the cost of a degree completed in four years ranges from $80,000 to over $200,000. And with increasing prices, you will likely need to save more than that to cover the expense. The earlier you start saving for your child’s college education, the better. That’s because starting early allows your money to work harder for you; if you invest the money in a college fund, you can take advantage of the market’s performance and compound interest, allowing your money to grow faster. Consider these examples:
Starting a College Fund at the Age of 5
Joe’s parents open a college fund for him when he turns five, and they contribute $250 per month. Assuming the account earns an 8% average annual return, Joe’s college fund will be worth $68,685 by the time he’s 18. Joe’s parents contributed just $39,000 to the account; the other money is due to the investment’s returns.
Starting a College Fund at the Age of 10
Mary’s parents begin saving when she’s 10. If they contributed $250 per month, they’d contribute $24,000, and the college fund would be worth $33,690. Because they started later, the fund has less time to grow. To ensure Mary had the same amount of money as Joe did by the time she’s 18, her parents would have to save over $500 per month.
Starting a College Fund at the Age of 15
David’s parents weren’t able to start saving until he was 15. With just a few years to prepare for college, David’s fund doesn’t have much time to grow. If they contributed $250 per month, he’d have just $10,201 by the time he was 18. To accumulate as much money as Joe has, David’s parents would have to save about over $1,600 per month.
| Joe | Mary | David | |
|---|---|---|---|
| Starting Age | 5 | 10 | 15 |
| Monthly Contribution | $250 | $508 | $1,680 |
| Total Parent Contributions By 18 | $39,000 | $48,768 | $60,480 |
| Total Balance By 18 | $68,230 | $68,005 | $68,099 |
| Growth | $29,230 (43% of total) | $19,237 (28% of total) | $7,619 (11% of total) |
| *These examples are hypothetical, and show the fund with 8.00% average return | |||
By starting early, you can contribute less overall. Waiting until your child is older will force you to contribute more to reach the same goals. How much should you save for college? You can use Saving for College’s savings calculator to see how your contributions can add up over time. [Tip: If you’re a student thinking about college, talk to your parents to see if it’s possible to open up a college savings account for you. If you will be paying for college on your own, you can open an account by yourself and contribute money from earnings from a part-time job.]
Ways Students Pay for College
Although helping your child pay for college is a kind and generous idea, it’s not realistic for everyone. And even if you do intend to help with the cost, your child may need to pay a portion of their education expenses themself. The majority of students receive financial aid, so your child can pay for college with a combination of the following methods:
Savings
Although parents can open a college fund for their children, the student can also save for their education. The following types of college savings accounts can help your child reach their financial goals:
- 529 Prepaid Tuition Plan: A 529 prepaid tuition plan allows you to purchase college credits for future use at today’s rates.
- 529 College Savings Plan: A 529 college savings plan is a tax-advantaged investment account. Money invested in a 529 enjoys tax-deferred growth, and withdrawals used for qualifying education expenses are tax-free.
- Coverdell: A Coverdell is another tax-advantaged account option. Contributions aren’t tax deductible, but your deposits can grow tax-free, and withdrawals used for eligible expenses are generally tax-free as well.
- Roth IRA: Although a Roth IRA is traditionally a retirement plan, some people use it to save for a child’s college education. Contributions to Roth IRAs use after-tax dollars, and qualified withdrawals are tax-free.
- UGMA/UTMA: A UGMA is an account in the child’s name. While it doesn’t have the tax benefits of a 529 or Coverdell, there is more flexibility with the money’s use. For example, your child can decide to use the money to buy a car, start a business, or as a down payment on a house.
Scholarships and Grants
Unlike other forms of college aid, scholarships, and grants are gift aid. Often referred to as “free money,” grants and scholarships don’t have to be repaid. Grants are usually awarded based on a student’s financial need, while scholarships are issued based on the student’s achievements. They can come from colleges, non-profit organizations, and companies, and there are opportunities for different groups.
Working While in School
Approximately 40% of college students opt to work part-time while in school. Whether they participate in a federal or state work-study program or have a part-time job or side hustle, they can use their earnings to pay for a portion of their education expenses.
Federal and Private Student Loans
For students that have exhausted other forms of aid, such as scholarships and grants, student loans can allow your child to pay for the remaining balance and earn their degree. There are two main options:
- Federal student loans: Issued by the federal government, federal student loans tend to have relatively low-interest rates and generous repayment benefits. Loans for undergraduate students don’t require credit checks, nor do they have a minimum income requirement. Students apply for federal loans by completing the Free Application for Federal Student Aid (FAFSA).
- Private student loans: Private student loans come from banks, credit unions, and other financial institutions. Loans tend to be credit-based, and lenders usually have minimum income requirements. Your child can apply for a loan by working with an individual lender like ELFI.
Rules for Deciding How Much to Save for College
College is expensive, and prices are steadily rising. When deciding how much to save, think about what you can reasonably afford without neglecting your own expenses and retirement plans. If you’re researching how much to save for college, some guidelines can help.
The Rule of 10
When you’re saving money for your child’s education, the rule of 10 could be a manageable guideline. With this strategy, you set aside 10% of your discretionary income — the amount of money you have after covering your bills and essential expenses — for your child’s college fund. Following this approach can help you afford your other goals, but your child will likely have to cover most of their college expenses with their income, scholarships, grants, or student loans.
The One-Third Rule
With the one-third rule, you plan to cover one-third of your child’s education expenses with your savings. For the remainder, one-third is paid for with your current income, and the rest is covered by your child through scholarships, grants, and loans. For example, let’s say the total cost of your child’s degree is projected to be $90,000. Following this rule, you’d aim to save $30,000 by the time your child graduates high school. You’d pay an additional $30,000 over your child’s four years of college from your household income, and your child would utilize financial aid to pay the remaining $30,000.
The 2K Rule
Popularized by Fidelity Investments, the 2k rule is based on how much you should have saved at different age levels. The rule recommends contributing $2,000 per year towards a child’s college expenses. For example, if your child is five, you should have at least $10,000 in contributions. Assuming you invest your contribution, this rule allows the market to do a lot of the work for you, causing your money to grow over time.
The “What You Can” Method
Saving thousands of dollars for college isn’t realistic for every family. If you can’t afford to save that much or feel that you’re behind, don’t be discouraged. Saving what you can reasonably afford when you can still have a big impact; every dollar you save is a dollar less your child will have to cover with loans or other financial aid. Small contributions can add up over time. And if you can’t afford to tuck money away for college, there are other ways to help your child, such as providing free or reduced housing while they’re in school.
Apply for a Private Student Loan with ELFI
Now that you know how much to save for college per month and year, you can start planning for your child’s future. If your child is in high school and researching their financing options as they prepare for college, student loans can play an important role in earning a degree. Although gift aid and federal loans are a good place to start, private loans can be useful tools if your child has expenses other financial aid won’t cover. With ELFI, students can borrow up to the total cost of attendance and have up to 20 years to repay the loan. You can view private student loan eligibility requirements and get rate quotes for undergraduate student loans online.
