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How Much Do You Need to Save for College?

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Conventional wisdom tells us that it’s never too late to start saving. But is that necessarily true when it comes to college costs? If you are a parent, how much do you need to save in order to pay (or even help to pay) for your child’s undergraduate education?

Let’s say you are having a baby. If you start putting away $100 a month for the wee one right now, by the time he or she is ready to start in on the freshman fifteen, you will have over $60,000 in the bank (assuming a 10% rate of return).  That sounds like a pretty big pot for a relatively small investment (just $100 a month). But is it enough?

The answer to that question is: It depends.

It depends on where you child attends school. The average total cost for tuition, room, board, and books at a four-year, in-state school is currently $12,800. Multiply that by four years and you wind up with a little left over in the college savings pot. But if your child attends a private school, especially an Ivy League caliber school, your money probably won’t cover more than a few semesters.

It depends on how much support you want to give. Some parents prefer to cover the total cost of undergraduate (and maybe even some graduate) education — tuition, rooms, board, transportation, books, even a monthly “allowance.” Other parents would ideally want to offer support for tuition and fees, but expect that their child will work (or earn scholarships/other forms of financial aid) to cover additional expenses like room, board, and pizza money. There is no wrong or right answer when it comes to how much you help your child pay for college. Figuring out your parenting perspective does help to answer the “Is it enough?”

It depends on how much other financial aid your child qualifies for. Let’s say you don’t want your child to have to take out college student loans to pay for school. Even without Sallie Mae, there are still a number of other forms of federal, state and private financial aid that he or she might qualify for, including grants, scholarships and federal work-study. And keep in mind that your child doesn’t have to be a stellar student or a star athlete to win a scholarship. Believe it or not, there are plenty of scholarships out there for kids with average GPAs… and lots more scholarships for unusual kids with quirky talents.

It depends on who else is helping to pay for your child’s education. Some people put themselves through school 100% on their own. Some have 100% funding from mom and dad. And still others piece together help and support from federal financial aid, scholarships, and working full- or part-time, plus help from parents and gifts from other family members. Grandparents, aunts, uncles, friends … anyone can contribute to your 529 Savings Plan for your child. Or they can start their own plan, with your kiddo named as the beneficiary.

Answering all of these questions will help you decide how much to aim to save for college. Unfortunately, the reality of your personal financial situation may not always allow you to reach that goal. Your rate of return may be lower, you may have to curb saving in order to pay for more immediate expenses, you may lose a job and not be able to contribute to your savings plan for a while. Don’t fret if you find yourself in that situation: That’s where additional financial aid and scholarships come in.

Keep in mind that no matter how much money have to save — even just $20 a month — the sooner you save, the more interest you will earn. And with compounding interest in your favor, you savings will grow bigger than if you only start saving a few years before college starts.

To see the affects of compounding interest, try plugging in some different numbers to this calculator.  To get some raw numbers, you might also want to try out this college planning worksheet from Smart Money or this college savings calculator from CNN Money.

Check back with us next week, when I discuss the pros and cons of different savings vehicles, such as the 529 Plans, Coverdell ESAs and traditional mutual funds.

Are you currently saving for college for yourself or your child? What’s your game plan?

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