How Much To Save For College
How Much Do You Really Need to Save for College?
It’s never too early to start saving for college. Considering the cost of a college education is rising year after year, it’s especially important that you get started saving early. In fact, the total student loan debt in the United States is $1.5 trillion and counting. Fortunately, a smart savings plan can help you keep the debt collectors at bay.
One obstacle that prevents aspiring college students’ from making a savings plan is confusion. No one knows exactly how much they should save for college. After all, there are so many expenses to account for, such as tuition, room and board, meal plans, transit passes, textbooks, and maybe a bit of spending money for those post-exam celebrations.
That’s why we put together this guide to starting a college savings plan. We’ll walk you through how much to save for college and how you can enjoy the college lifestyle while not going overboard on expenses.
Envision Your Future
Let’s assume you’re saving for yourself, and not for your child or grandchild’s college education. Do you see yourself going to an in-state public university or a private non-profit college? The cost difference, of course, is astronomical.
For the 2018-2019 academic year, the average cost for a full-time student at a private four-year college was $35,000. Prestigious universities can cost tens of thousands of dollars more per year. Keep in mind, however, that this figure excludes financial aid like grants, bursaries, scholarships, and tax incentives.
The more economical option is to attend a public state-system university, like the University of Iowa or the University of California. On average, these schools cost about $9,970 annually if you stay within your home state.
If you don’t feel like doing the math, you’ll save about $25,000 per year by choosing a public in-state school over a private institution. So it’s important that you figure out which type of college you want to go to. The more economical option, of course, is a public school.
How Much Money Should I Save For College?
Your individual monetary needs for college will vary. But roughly speaking, you should aim to save $65,000 for a public, in-state college, $100,000 for a public, out-of-state school, and $120,000 for a private school.
While the numbers above may seem intimidating, there are ways to save for college that can make the experience easier thank you might think. It starts with devising a plan.
Step 1: Open an Account
If you’re still years away from going to college, now is a great time to open a 529 college savings plan. Like a “college Roth IRA,” a 529 savings plan is an investment account that offers tax advantages and accrues value over time. Growth in a 529 plan is tax-free, and withdrawals for school-related expenses (i.e., books, tuitions, laptops) are untaxed, unlike mutual funds.
The beauty of the 529 savings plan is that the money invested in it grows relatively fast over time compared to a standard savings account. For this reason, even $150 or $200 per month for five years can go a long way toward covering tuition costs at a public in-state college.
Similarly, a Coverdell Education Savings Account (ESA) is another form of tax-advantaged investment account for US residents saving for college. This option has a lower maximum contribution limit. Presently, there’s an annual limit of $2,000 per child, and tax-free withdrawals are permitted for elementary and secondary school purchases.
Ultimately, the question boils down to whether you want to open a Coverdell ESA college fund or a regular 529 investment account. Since there’s an age limit (30 years) on when ESA accounts can be dispersed, we suggest opting for a 529 plan if you’re already in your twenties.
Step 2: Commit to a Goal
It’s hard to save money without having a concrete goal in mind. Whether it’s your retirement or education, you must know how much to sock away every month if you want to hit your target. In other words, you need a goal.
We suggest using a college savings calculator like the one found on Student Loan Hero. Here you will find calculator tools to determine your tuition and fees, tax benefits, and various other item costs without having to consult a financial planner or financial advisors.
As an example, let’s suggest you run your income and expected expenses through the calculator and find that you need to save $300 per month for five years. Although that may seem like a hefty sum, it’s important that you have this precise figure narrowed down.
Step 3: Look into Financial Aid
There’s no faster way to come across a windfall for your college expenses than to apply for financial aid. American college students have many non-repayable grants, scholarships, and bursaries available that are based on academic merit or financial need.
Perhaps the best-known grant program in the United States is the Federal Pell Grant system. These grants are unlike scholarships in that you do not have to pay them back. Pell Grants are also based on holistic criteria that include one’s financial need. Eligibility for a Federal Pell Grant is determined by several factors such as:
- Your family’s income and expected contribution
- The cost of your college program
- Your part-time or full-time student status
- Your long-term academic plans
Pell Grants are worth up to $6,000 annually and constitute the backbone of most American students’ financial aid packages. However, it’s a good idea to shop around your state and hometown for scholarships that can help you start saving by the thousands.
Step 4: Start Putting It Together
Now that you know how much to save for college, you can start, well, saving. A little bit of sacrifice, a sizeable financial aid package, and some hard work can go a long way toward covering your college expenses.
If you have a part-time job, consider putting aside at least 20 percent of your weekly paycheck to contribute to your Coverdell ESA or 529 investment plan. This way, the value of your contribution can appreciate over time and you can watch your money grow. Given the high cost of college, it’s crucial that you let your money vest in a tax-advantaged account.
There are ways to save even before you hit your high school years. For instance, you can put aside birthday and holiday money from friends and loved ones. Ask your parents to put your money in a trust so that it can be held by a trustee (i.e., a bank) on behalf of the beneficiary (that’s you!). Before you know it, you’ll be inching closer to your savings target.
It may seem like a daunting task, but it’s possible. Work summer jobs between spring and fall semesters. Get a job on campus, or work as a resident assistant (RA) or residence don. For many of us, these are necessities if you want to pay for college and stave off student loan debt.
Step 5: Adjust Your Goals Accordingly
Your financial targets should be based on the school you’re going to. Since private schools are more expensive than public schools (both in-state and out-of-state), it’s crucial that your savings strategy reflects this difference.
Parents saving for their child’s education need to be aware of the massive financial commitments that private schools require. For instance, the parents of a four-year-old need to put away roughly $400 per month until the child is 18 if they want to pay for a four-year degree at a private college. That’s not a small sum, right?
Now, let’s compare that figure to what it would cost to save for a child to attend an out-of-state public school: $325 monthly. Those are savings of about 20 percent, and all it took was switching to any public school around the country instead of a private school.
Lastly, public in-state schools can be paid for in their entirety with only a single $200 contribution every month in a Coverdell ESA or 529 plan. Remember, these investment strategies only work if you invest your savings in a tax-advantaged account—not a regular savings account.
Step 6: Consider Cheaper Alternatives
If you can’t afford to shell out $200 or more every month for your or your child’s education, consider alternative options. For example, College Board estimates that the average tuition fees plus on-campus room and board at a public college amounts to $20,000. To shave thousands off this total, you can choose to live off-campus.
Living in a modest apartment off of your school’s campus can save you some serious coin. If you add roommates to the mix, suddenly your overall cost of living at college can be reduced by up to 50 percent. Budget-minded college students should opt for living with classmates at a modest apartment away from campus to get the best value out of their college experience.
Students who decide to live off-campus should be mindful of transportation costs. Although many student unions now offer subsidized public transit passes to students, many do not. That’s why it’s important that you choose an apartment that isn’t too far from class. Otherwise, you may need to invest in transportation options. Ideally, you should be able to walk to class.
Purchasing a vehicle can wreak financial havoc on college students. To help you save money for college, consider going to school in a walkable city that has affordable public transit options. Although it doesn’t sound like much, this decision can save you thousands over the course of your four years at school. Here are some other ways to save money as an active college student.
Need Savings Tips? Charlie’s Got You Covered
At HiCharlie, we’re here to help you put away the cash you need for college. With nothing to download or install, Charlie provides you with budgeting tips, credit advice, savings strategies, and so much more. Try HiCharlie today today to get started on the path to financial freedom – and don’t worry, it’s 100% free.