If you're looking at saving for college expenses, you might be feeling a little overwhelmed. Just how much should you be saving? How expensive is "expensive"? Many plans, like 529 College Savings Plans, are tax-free, but they're only tax-free for the money that goes toward educational expenses. If you invest too much, then you'll be subject to penalties when you withdraw the extra money, so it's important to know how much you should be saving.
In order to successfully save the correct amount, you not only need to bust out your dusty old calculator, but you also need to know how to calculate your unique savings needs. When estimating future college expenses, start with the following items.
Tuition
For most students, tuition is the largest cost of college. It's also the hardest to factor into your savings because the amount of tuition paid each year varies significantly with the type of institution attended. Generally, junior colleges are the least expensive while private schools are the most costly.
Ideally, you should do your best to get an idea of where your child might be going to school, but that's hard to do if your child is young. If you can't get a sure answer, I recommend using the average cost of a public, 4-year institution, which is around $25,000 a year. Don't forget that the cost of college doesn't stay the same, though, you should figure in an extra 2-3% a year for inflation.
Housing
Housing presents another costly expense for college students. Students typically have with 4 housing options.
- Dormitories
- On-campus Apartment
- Off-campus Apartment
- Commuting From Home
Many students use some combination of these options, like living at home the first year, then moving into an off-campus apartment. The best way to plan for this is to look at the average cost of an apartment near the university closest to you. It won't be exact, but it should give you an idea of the cost of housing in your area. On average, figure that it will cost at least $500 a month for your student to pay for housing and food.
Fees and School Supplies
No college savings calculation would be complete without including fees and school supplies. At many colleges, students incur fees of several hundred dollars per year. School supplies including textbooks, online course supplements, and more will probably average over $1,000 each year. If you have a specific institution in mind, their website should list their average fees, but if not, you can use the $1,000 figure to get a ballpark idea.
Now What?
After you complete the important process of estimating your kid’s future college expenses, you might find yourself staring anxiously at a bunch of raw data. The best thing to do next is to ask yourself a few questions, such as:
- How much of my child's school do I want to pay for? 50%? 100%?
- How much money can I afford to contribute every month?
- How long do I have to save up?
- Will I be the only one contributing to this savings account?
Once you have your answers, you can use these to manipulate your numbers.
Now, for the math. The jumbled numbers may not appear to make much sense. However, once you total them up, you'll know approxiamately how much money that you need to cover your child's expenses.To find out how much you need to save, you have a few options. You can use an online calculator, like a 529 Plan Calculator, you can use another form of savings account calculator, or you can input each of your estimated annual expenses into a spreadsheet program.
A spreadsheet is the most convenient way to figure out your expenses since you can save your data for comparison. Using the formula bar, you can add up the individual expenses on the spreadsheet. You should also consider creating spreadsheets for different scenarios. For example, you may wish to include optional expenses on one spreadsheet while leaving them off on another one.
Once you've found your subtotals for each section and then the grand total of the cost, you can decide how to start saving. For example, if you find that you'd need approxiamately $100,000 to pay for a four year, public institution, and you decide you only want to contribute 50%, you'd only need to save $50,000. Then you divide that by the number of monthly installments you plan to make in order to find your monthly contribution rate.
Which Savings Plan Should I Use?
To save for college expenses, many parents opt to invest in a 529 plan. This type of savings alternative will allow you to contribute money into an account tax free until you need to take it out to pay for college costs. 529 Plans are investment based, so before opening this type of savings account, you should use a 529 Plan Calculator. These are specially programmed to help you predict how much you will earn on your contribution in a high risk account vs a low risk account, for example.
There are other plans available too, such as a Coverdale Plan or a traditional savings account. For more information about these savings programs, read 10 Things You Should Know About Paying For College. As a general rule, the best thing to do is start early. If you don’t want to stress in the future about college costs, be proactive and start saving money today. The sooner you start, the more you'll be able to save.
