So far, we've covered the why and the how-much aspects of saving for college. In this article, we'll delve into the how-to aspect of financial planning for college. Let's say you want your child to go to Stanford, and you know today the price tag is about $40,000 per year, or $160,000 for four years. And let's also assume you're earned income makes it practically impossible to receive meaningful financial aid.
What you really need to know is... How much should you save each month to cover the cost of college?
A few factors other than price come into play, those being:
- The education inflation rate
- The rate of return you expect on your college savings/investments
- The length of time until you begin paying the bill
- The tax status of your savings account or investment account
For the sake of simplicity, we'll assume that inflation is low (6%), and you use a 529 college savings account, so taxes are zero. We'll also assume you have saved nothing for college so far, and that grandma and grandpa will not come to the rescue in the final hour.
The table below helps you determine how much money you would need to save every month to reach your goal.
Years to college | Hypothetical Rate of Return | ||
8 percent | 7 percent | 4 percent | |
18 | 979 | 1,213 | 1,489 |
17 | 1,025 | 1,253 | 1,518 |
16 | 1,077 | 1,298 | 1,554 |
15 | 1,135 | 1,350 | 1,596 |
14 | 1,201 | 1,410 | 1,646 |
13 | 1,276 | 1,480 | 1,706 |
12 | 1,364 | 1,561 | 1,779 |
11 | 1,468 | 1,659 | 1,868 |
10 | 1,591 | 1,776 | 1,977 |
9 | 1,742 | 1,921 | 2,113 |
8 | 1,929 | 2,103 | 2,287 |
7 | 2,170 | 2,337 | 2,514 |
6 | 2,490 | 2,652 | 2,821 |
5 | 2,937 | 3,093 | 3,255 |
4 | 3,607 | 3,758 | 3,912 |
3 | 4,723 | 4,868 | 5,015 |
2 | 6,954 | 7,091 | 7,230 |
1 | 13,644 | 13,771 | 13,898 |
Here's an example of how to use the table:
If your student is 6 years old today, you have 12 years left to college (find the "12" in the first column). Then, slide your finger over to the column that contains your expected rate of return. For instance, if you're expecting a 7% rate of return, then you would need to save $1,561 each month to be able to pay for four years of Stanford (or just about any other private university).
What we can learn here is:
- Investing aggressively makes a big difference if you start early. For a newborn student (18 years to college), doubling the projected rate of return from 4% to 8% reduces the amount you need to save, by about one-third ($1,489 versus $979).
- It's smart to invest more conservatively if you're close to college. With only five years left before college, you only reduce your total monthly savings by about 10% ($3,255 versus $2,937) when you invest aggressively.
And there's one more lesson to be learned here.
No matter when you start saving, or how you invest, the amount you must save can be significant, and these projections only assume one child is going to school. If you're like many of the physician families we serve, you have two children, and maybe as many as seven.
In my next article, I'll discuss the pros and cons of various accounts, or the "where" of saving for college.