Saving money for college now is a sure way to reduce student loan debt in the future, but most families question “How much is enough?” It would be nice to be able to pay for all of your student’s expenses, but that is probably not realistic. Most parents still have to pay their day-to-day bills and save for their own retirement. You want to save as much as possible, but here are a few things you can take into consideration when thinking about how much to put aside:
• Your child’s age: The power of interest goes a long way toward creating a college nest egg when money is saved over a long time. If you start when your child is a baby, you can put smaller amounts of money away each month. If your student is already a teenager, your family might have a bigger struggle ahead.
• Make projections, but don’t be surprised at the amount: You should be able to estimate college costs for a current high school student, but long-term projections can be difficult. If current trends continue for the next ten years or so, it could easily cost over $130,000 at an in-state public school and over $235,000 at a private college. Keep in mind that this is not necessarily the amount you will pay. A great deal depends on the amount of financial aid your student receives. Many highly-rated universities offer financial aid packages that can lower the cost by as much as one-third to one-half.
• Set a limit: A reasonable rule of thumb is to save one-fourth to one-third of the expected expenses. Many parents believe they should be responsible for paying for everything in college, but the student will be reaping the benefits of this education. Have regular money discussions to convey exactly what you can do and what your expectations are for your student. Set out responsibilities for jobs during high school and college so your student can save money, too. If you can only afford to pay for an in-state school, but your student wants to go out of state, talk about how that could be accomplished. Clearly state how much you are willing to borrow and repay in student loans, and how much will be your student’s responsibility.
In general, you need to save anywhere between $1500 and $7500 per year from birth, depending on your level of commitment. You can do all the saving or you can also have your child contribute some money from birthday and holiday presents, or a percentage of any job income.
Get more information on saving money for college in my new book, Secrets of a Financial Aid Pro. It takes parents and students through the life-long process of thinking about money, discusses federal and private student loans, and recaps the financial aid process. Order it now, and start involving your children in discussions about how your family will need to budget, plan and pay for their college education.