When it comes to saving for your kids’ college, it’s almost more important what NOT to do. Here are my dos and don’ts for parents worried about paying for their kids’ college.
- DON’T save for them before you save for you. Think of this as putting on your oxygen mask first. The impulse to put your children’s needs before your own is natural for parents, but the best thing you can do for your children’s future is to make sure your own future is secure. So, be sure that you’ve maxed out the contributions to your own retirement accounts, whether it’s at your company or in an individual IRA. Be sure that you are well on your way to security, and then start aggressively saving for your children.
- DON’T necessarily default to a 529 Plan in saving for your kids’ college education. They can be more expensive than other kinds of investments, they can only be used for education expenses, and sometimes the investments are not top notch, depending on what state you’re in. Furthermore, when colleges look at all your kids’ sources of support, as they consider providing scholarships or loans, they will take a 529 Plan into account. So savings in these accounts can reduce your kids’ overall eligibility for financial aid.
- DO keep some savings in other accounts like your IRA to maximize your children’s access to financial aid. Unlike a 529 Plan, savings in individual vehicles such as your individual IRA are not considered by colleges when considering how much financial aid to offer your children. You can contribute those savings after you’ve received notice of what the college is willing to offer.
- DO know how much you need to save, so you DON’T fail to save enough. Having a clear goal is key to reaching it. When it comes to calculating how much to save for college, here’s a simple way to think about what you’ll need. Private colleges can cost as much as $50,000/year, while community colleges can be as low as $5,000/year. So, on average, you should plan on college costing about $25,000/year per child. If you have (say) three kids, then at $25,000/a year per child, you will need to save $350,000. (This amount includes an additional $50,000 for inflation and projected tuition increases.)$350,000 is steep, I know. A less expensive option for this same family would be two years at a community college and two years at a low-cost state school. With this option, the family would need to save $40,000 per year per child, for a total of $120,000.
Plan on having at least half the total amount saved by the time your kids start college.
- DON’T give up. In a recent poll we conducted at SUM180, we learned that saving for college is the #1 worry of people age 35 and up. This worry is understandable; people get just how Herculean the task of paying for college has become. A perfect storm of factors has come together: tuition is up, grants are down and loans are maxed.
It’s no wonder families feel that no matter how hard they try, the odds are against them. It’s no wonder that some families give up.However, parents who want the best for their kids—including a great college education—need to understand that it is still an attainable goal, as long as they are committed to saving diligently. Saving $4,000-5000 per year per child for 10 years is enough to make it work.
For more on this topic, I’ve been sharing advice on saving for college and managing student loan debt in our weekly webcast:
- The Dos and Don’ts of Saving for College
- Are You Saving Enough for College?
- Student Loans: It’s Personal
- The Student Loan Debt Default Crisis