Saving for Your Child’s Education

by Mitchell J. Smilowitz, CPA

There’s no simple guideline when it comes to saving for a child’s education. When you think about it, this makes sense. There are just too many variables involved with calculating the amount of money you will need. This article addresses these challenges and suggests some options for how you can pay for your child(ren)’s college education.

College Costs Vary Greatly

Annual tuition and room and board costs vary greatly depending on whether your child attends a private college, state school as an in-state resident or state school as an out-of-state resident. According to The College Board®, the average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges and $25,620 for out-of-state residents attending public universities. The cost of room and board in 2017–2018 averaged $12,210 at private schools and $10,800 at public schools.

Tuition Inflation Exceeds Cost-of-Living Inflation

Over the last 10 years, college tuition inflation has greatly exceeded the rise in the cost-of-living. While general inflation has been less than 2% over this period, The College Board® reports an average tuition increase of 5% annually over the last 10 years. In 2018, inflation was 3.7% at private colleges and 2.9% at public universities.

No one can say for sure what will happen to college tuition going forward, but most experts believe that education inflation will continue to increase faster than the general cost-of-living.

When Did You (Will You) Begin to Save?

While compound interest plays a major role in saving for a child’s education, the time frame is much shorter than when saving for retirement. Assuming you begin saving when your child is born, you only have about 18 years for your earnings to accrue.

The takeaway? Start saving as early as possible to get the maximum value from compounding.

How to Think about College Savings

At this point you may be thinking “How will I ever save enough to put my child through college?” The answer is, you don’t have to. In addition to savings, you can also fund college expenses through current income and loans and/or grants. One way of thinking about this is the Rule of Thirds: paying 1/3 of tuition from savings; 1/3 from current income; and 1/3 through loans and grants.

Student Loans

A wide range of student loans are available. Start with exhausting the opportunities for federally subsidized loans before considering private student loans. Stafford and Perkins loans are the most common subsidized loans. For more information visit the Federal Student Aid website. Remember that your income will impact both your eligibility for some loan programs and the interest rate you will pay.

529 Plans

Qualified Tuition Plans, more commonly known as 529 plans (named for the section of the tax code that authorizes them), offer tax advantages for college savings. There are two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to purchase credits at participating colleges or universities. The benefits are limited to these schools. Education savings plans allow you to open investment accounts dedicated for educational purposes. These funds can be used to pay for qualified education expenses. All 50 states offer at least one kind of 529 plan, but the details vary greatly.

Keep Saving for Retirement

It may be tempting to put your retirement contributions on hiatus while you are saving for a child’s college tuition. We urge you not to do it; the financially responsible action is to continue contributing to your retirement account. Why?

  • You can’t borrow for retirement.
  • Retirement costs far more than college.
  • The tax benefits from retirement savings exceed those from 529 plans.
  • You don’t want to be a burden on your children when you retire.

Fitting College Savings into Your Financial Plan

To estimate what you need to save for your child’s college education, take a look at the Fidelity College Savings Calculator. It allows you to model the amount you expect to pay in tuition, your child’s age when you begin saving and the percent of college costs you expect your savings to cover.