Saving for College
Updated: Jan 23, 2020
Over the last three decades through 2017, the average tuition at public, four-year colleges increased 549%. Over that same time frame, incomes only rose 135%. While inflation is typically estimated around 2.5% to 3%, most financial planners assume 6% for college education costs. Whether or not this is sustainable is difficult to say. What is clear is that providing a college education for your children has a decent chance of being costly and it would be wise to plan accordingly.
How much should you be saving? As is often the case with this question - it depends. For starters, what portion of your child's education are you hoping to provide for? Are you hoping to send your child to a private or public university? Will you be sending them to a 2 year or 4 year institution? Keep in mind that for the 2017-2018 academic year, average tuition at a public institution was $25,290 for the year. For a private institution it was $50,900.
A Couple of Anchoring Points
- At 6% inflation with a 7% return, parents of a baby born this year would need to save $1,000 a month for four years of public school and $2,000 a month for four years of private school.
- At 2.5% inflation those numbers drop to $372 for public and $750 for private.
As jarring as those numbers are, there’s a lot going on. 6% inflation is really high and given the current situation with student debt in our country, there is a good argument for some pretty significant changes in higher education. Not only that, but this doesn’t consider any scholarships or types of financial aid your child might receive. While it’s advisable not to rely solely on scholarships to provide for your child’s education, there is still a decent chance they will receive some kind of support. Take a deep breath. It’s not as bad as it sounds.
Once you decide you'd like to save for a child or grandchild's education, you'll want to consider the most efficient way to go about it. There are a variety of accounts that offer tax benefits. The most common are 529 accounts and Coverdell ESAs. 529 accounts are state-run programs that allow you to save tax free – meaning you don’t pay taxes on the returns earned as long as you use the money for qualified education expenses. There are no limits to how much you can contribute (other than gifting limits) and funds can be used on private primary schools (up to $10,000 a year) as well as undergraduate and graduate degrees. Coverdell accounts also allow you to save tax free. They are, however, limited to $2,000 per year per beneficiary. Coverdell accounts must be used before the beneficiary turns 30. Funds not used on educational expenses are subject to a tax penalty.
 Andriotis, AnnaMaria, et al. “Families Go Deep in Debt to Stay in the Middle Class.” Wall Street Journal, 1 Aug. 2019, https://www.wsj.com/articles/families-go-deep-in-debt-to-stay-in-the-middle-class-11564673734.
 “What's the Price Tag for a College Education?” CollegeData, CollegeData, https://www.collegedata.com/en/pay-your-way/college-sticker-shock/how-much-does-college-cost/whats-the-price-tag-for-a-college-education/.