One of the top questions we get is how much should I be saving every month for my child’s college expenses. This is both an easy, and a hard question to answer. The easy answer is: as much as you can. When you think about it there are only two ways you are going to pay the college bill; by saving the money in advance, or by borrowing it at the time you need it. When you save, you hopefully will get your savings to grow over time through market growth, interest and dividends. Think of that as extra free money. When you borrow, you have to borrow the full amount you will need, plus any costs to get the loan including origination fees, plus you have to pay back interest on the loan amount. This chart shows those costs.
The more you can save, the less you have to borrow, which means it makes sense to save as much as you can. The hard part of the question “How much should I save” are all the variables that each family has. Will your child go to a 2 year certification program or a 4 year school? Will they graduate on time? Will they go to a public institution or a private one? As an example, depending on what source you use a 4 year public college could cost close to $200,000 for 4 years of school 18 years from now.
So where to start? A college savings guru, Joe Hurley, has said in the past that saving $250 a month, starting when your child is born, is a great place to start. For our example above saving $250 a month could translate into about ½ the money needed, or $100,000 saved up, assuming a 6% return.
Click Here and check out this great college savings planner to play around with the numbers to see what might be right for you.
Whatever you do, don’t just look at the cost of college and say I will never be able to save for all of it. Do what you can, and your kids will, eventually, thank you for it. $50 a month is better than nothing, and really does add up over time.