3 Ways To Decide How Much to Save for College

Choose the right goal for you, then get started

Happy young African American male student
Photo: Brothers91 / Getty Images

When it comes to paying for college, the earlier you begin, the better. But getting started can be overwhelming. The price of college is rising—the cost of college has grown faster than the overall basket of goods and services that people generally buy since 1980—and there’s a host of other unknowns to plan for. Should you choose a public or private university? Should you stay in-state or go out of state? Could your child get scholarships? What about grad school?

Luckily, you don’t need to know the answers to all these questions to start saving. Here are a few strategies for deciding how much to save for college.

Key Takeaways

  • The first step in saving for college is determining how much you want to contribute to your child's education: a percentage, a dollar amount, or the entirety of costs.
  • There are three main strategies for saving for your child's education: planning for an end balance, breaking your savings down to monthly contributions, or contributing a percentage of your discretionary income.
  • Setting aside a percentage of your discretionary income each month is best for households with strict budgets.

Choose an End Goal

One of the most common ways to set a savings goal is based on the projected cost of college. It helps to start by using one of the calculators out there to help you estimate the cost of college for your child, based on factors like your child’s age, the type of school you expect your child to attend, and the expected rise in the cost of college. You should also consider whether there is a specific school that you already know your child wants to attend.

Getting a little sticker shock? The good news is that whether you’re saving for in-state, out-of-state, or private, you don’t have to plan for the whole amount.

Financial advisors might instead recommend saving between one-third and 50% of the cost of college, with the expectation that the rest will come from financial aid, scholarships, and current parent and/or student income. This can make the goal of saving for college feel more realistic and achievable.

For example, let's that you just had a child and you’re ready to start saving now. In order to pay a third of the projected cost of college, your end goal might be $44,753 for a public in-state university, $69,346 for a public, out-of-state school, and $112,072 for a private college.

Set a Monthly Goal

Is it a little too difficult to imagine the end goal, years from now? Consider walking it back to a monthly contribution amount. Just remember that how you save will make a big impact on how much you save by the time your child starts college.

Many experts recommend using a 529 college savings plan, a tax-advantaged investment account. A 529 plan offers tax-free growth and withdrawals for qualified higher education expenses, which include tuition and fees, room and board, books, computers, and special education expenses.

What does this mean for you? Choosing a 529 plan could mean a much lower monthly contribution since the money grows over time. With a 529 plan, a solid monthly contribution amount for a child born in 2022 would be about $140 for a public in-state school, $215 for public out-of-state, or $350 for a private university. 

If you intend to save using a traditional savings account or a taxed investment account, you’ll want to adjust your monthly contribution accordingly. For example, the average interest rate on savings accounts as of January 2022 is just 0.06% APY (annual percentage yield). At that rate, in a savings account, you’d need to contribute about $230 per month for 18 years to pay for a third of the projected cost of a public, in-state college; around $350 for out-of-state; and around $550 per month for a private university. Much more than the required savings compared to a 529.

Using a taxed investment account can yield significantly better returns on your savings. With an average 7% return, a monthly contribution of about $115 would cover the projected cost of a public in-state university, $180 for out-of-state, or $290 for a private college. However, you will miss out on the 529 plan’s tax exemptions on dividends and gains.

Determine What You Can Afford

Lastly, you can set a monthly savings goal for college based on what your family can afford. This is a good approach if there’s not much wiggle room in your budget.

Of course, what’s affordable will vary widely from one family to the next. If you’re not sure what’s doable for your family, try breaking it down using the Lumina Foundation’s Rule of 10 formula.

Though originally intended as a benchmark for colleges seeking to expand access to higher education, the formula can certainly be utilized by families. This approach recommends that families pay for college using the benchmarks:

  • Families save 10% of their discretionary income
  • Families save over a period of 10 years
  • Students work 10 hours per week while attending college

Discretionary income is typically defined as total after-tax income, minus all minimal survival expenses such as food, medicine, housing, utilities, insurance, transportation, and so on.

However, the Lumina Foundation states that for the purposes of these benchmarks, any income above 200% of the federal poverty level is “discretionary.” For a family of four in 2022, that would be any income over $55,500.

Following this formula, a family making an average of $100,000 annually might save 10% of the remaining $44,500, or $445 per month. Over 10 years, that’s more than $53,000 saved for college. With a student working 10 hours per week for 50 weeks per year at the current $7.25 minimum wage, that’s an additional $3,625, for a total contribution of $14,500 over four years.

Of course, if your income increases or decreases, your contributions can be adjusted accordingly. And you can always make this methodology go further by using a tax-advantaged savings tool to grow your money over time.

For example, if a family with an 8-year-old child began saving $445 per month in a 529 savings plan, that amount would grow to be enough to cover the third of costs that experts recommend for a public-out-of-state school, or about half the cost of an in-state university.

The Bottom Line

While it’s easy to get sticker shock from skyrocketing college costs, remember that the amount you need to save is likely much lower.

The important thing is to start as early as possible and to be consistent with saving. However, if your child is older, don’t panic—you can still save a significant amount in a shorter time frame.

Financial aid, scholarships, student work, your income while your child is attending college, and contributions from family can all help to make up the rest.

Frequently Asked Questions (FAQs)

What's the best way to save for college?

Many experts consider a 529 plan the best way to save for college because of their favorable tax treatment. A 529 plan would usually not have to be reported on a FAFSA as long as the dependent student or their parent owns the account, but withdrawals may reduce the students financial aid package. Roth IRAs can also fund a college education, but the withdrawals count as income for financial aid purposes. Additionally, only contributions can be withdrawn at any time. Earnings would be subject to income tax and an early withdrawal penalty if the owner of the IRA is younger than age 59 1/2.

How do you open a 529 plan?

To open a 529 plan, you'll need to decide whether you want to open a prepaid tuition plan or a college savings plan. Next, you'll need to choose a provider and which plan you want to open. Consider plan fees when deciding on a plan. You'll also need to choose a beneficiary and fund the account. Finally, if you've selected a savings plan, you'll need to choose your investments.

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  11. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

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