Like most Americans, you likely want your child to go to college. Figuring out how much to save or whether you are on track can be daunting. Tuition costs have risen at more than twice the rate of inflation since the start of the century. The good news: if you start early, you can create a plan to reach your college savings goals.
How Much Do You Plan to Pay?
First, determine how much you want to cover. With multiple financial goals to juggle, it’s common that parents don’t pay for 100% of their kids’ education costs. It’s important to have conversations early on about how much you might want to cover.
How Much Will It Cost?
Seeing the cost of college education can cause sticker shock for a lot of parents and rightfully so. On average it will cost $22,690 per year to attend a four-year public college. If you choose to attend an out of state or private school, costs could be above $50,000. Start preparing by looking at different schools to get an idea of the total cost.
How Much to Save?
After you have determined the cost and percent you want to cover, you can begin calculating how much you need to save.
For example, let’s say you’ve just had a child and you want to pay for him to go to Michigan State University. The estimated amount you would need to save is $635/month.
Here’s the information we used to calculate this figure:
Tuition (out of state): $40,726
Room and Board: $10,676
Inflation rate: 2%
Investment return: 7.5%
Years Until College: 18
(These are estimates and are not intended to be exact figures)
The amount you should be saving will vary greatly based on your goals. To set yourself on the right track, you should have a ballpark estimate on the total cost. Once you have that, you can determine an appropriate amount to save.
Where to Invest Your Money?
If you are investing for college, you should consider opening a 529 savings plan or state sponsored investment account. With a 529 plan, individuals can use the money for qualified education costs without paying tax on any gains. In Illinois, you get a state deduction up to $10,000 per year by an individual, and up to $20,000 per year by a married couple filing jointly.
For more details, check out my post 529 Plan: Saving for Education.
Every family has different goals when it comes to funding their child’s education. Once parents determine their goals, they can meet with their financial advisor to create a plan.
To make sure you are on track with your savings goals, review your investments and progress at least annually. Over time you will likely need to update costs based on the most recent information.
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Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.