How Much Should You Save for College?
Saving for college feels like the ultimate moving-the-goalposts goal. After all, you don't know how much college will cost until your child actually chooses a college. How does a parent of a two-year-old know how much to save? Or even of an 8th grader, for that matter? Public? Private? Scholarships? How much will tuition increase over the next 16 years?
And if you think it's hard to figure out on your own, wait until you ask for advice. Even professionals like financial advisors give terrible advice, usually at one of two ends of the spectrum (I say this as a financial advisor because I've seen the kinds of advice people give):
"Save for retirement, not for college. There are loans available for college but not for retirement." (Editorial note: how do you think we ended up with over $1.7 trillion in outstanding student loan debt?)
"Private colleges cost $85,000 per year. If you want your child to be able to go, you need to save $2,000 per month."
It's no wonder that only about 1/3 of families have 529 accounts for their children. Also not surprising: on average, parents don't start saving for college until their child is 7 years old, meaning that they pass up on years of potential tax savings and compound growth.
The right amount of savings isn't $0, but it isn't $2,000 per month, either. If you're reading this, college is probably important to you, and if a goal is important and expensive, like college, you need to be disciplined and intentional in how you create a financial pathway to it. Savings has to be part of that pathway. But college savings is only one of several types of savings a family should have, and it needs to be balanced against those other types of savings.
Your big three savings categories as a family are:
Emergency savings. Ideally you have between 3-6 months' expenses saved in something safe like a high yield savings account.
Retirement savings. Yes, it's more important than college savings, but you also have a lot more time and options for retirement savings.
College savings.
Here are my rules for balancing these.
First, prioritize savings in the above order: emergency savings first, then retirement, then college. If you don't have emergency savings, you put yourself at risk of getting into credit card debt if something goes wrong. So get on your emergency savings. Retirement savings comes next; if you aren't saving for retirement, you should not be saving for college. College comes third. But remember, third place is still on the podium.
How do you balance saving for retirement with saving for college? I recommend looking at the two hand-in-hand. If you are not saving for retirement, start that first. Open a Roth IRA, contribute to your 401k at work, do something. Only after you've got that started should you think about college savings.
Once you're contributing to retirement, balance it this way: If you are not maxing out retirement, which for 2024 means $23,500 to a 401k if you're under 50 or $30,500 if you're 50+ or $7,000 to an IRA (under 50; $8,000 50+), then no more than 10% of what you're saving for retirement should go into college savings. For example, if you're putting $10,000 per year into your 401k, then don't put more than $1,000 per year into college. If you want to save more for college, save more for retirement. Good news: your 401k contributions get you a tax break, so you'll have a little extra for college.
If you are maxing out retirement and have money to spare, consider targeting your state's maximum deductible amount. Or work backwards from college costs. To have the full cost of in-state public college covered by the time your student graduates from high school, you'd need to save $375 per month for 18 years. Of course, if you're saving $375 per month, that means you have $4,500 extra that you could spend on college each year, so maybe you don't have to save $375 per month. Want to be able to spend $50,000 per year from savings? $500 per month should get you there.
Here's the thing about college costs: College costs whatever you're willing to pay. Whatever dollar amount your budget supports, your child will have good choices. Saving more just gives them more choices. And thanks to tax advantages and financial aid benefits, saving in a 529 will mean they have even more choices.
Want to learn how to make the most of your savings? Pick up a copy of my book, How to Pay for College: A complete financial plan for funding your child's education.
