- Saving for college can seem overwhelming. Many people take a “wait until we can afford it” or “we’ll just borrow the money” approach. Yet doing nothing or waiting to start saving can be costly mistakes. Starting now can reduce the burden of borrowing and reduce the pressure on current income significantly.
Meet the Wards
Diane and Charles Ward have two children — Emily, age 5 and Jacob, age 3. They plan on Emily attending an out-of-state public school and Jacob attending a private university, giving them 13 and 15 years, respectively, to prepare for this expense.
The hypothetical chart below illustrates how much the Wards need to save on a monthly basis to target 100% of Emily’s out-of-state public college tuition. If they start now, they will need to save $626 per month. Waiting two years will require an additional $140 per month; waiting five years will require an additional $450 per month.
Jacob’s private school tuition, room and board is going to be even more expensive than Emily’s (400,980 vs. $185,516).1 But the Wards don’t have to save it all. They can aim for a percentage of the total and pay the rest with loans or future income, so that saving a portion of the money now will help ease their burden later.
Using future income for tuition
Let’s assume the Wards save 50% of the tuition, room and board needed for Jacob and Emily ($200,490 and $92,758, respectively). If they want to pay the remaining 50% out of future income, the chart below shows what their situation could look like.
Perhaps the Wards think that in the future they can use a monthly payment plan to meet a significant portion of their higher education expenses. But consider that the $4,177 per month needed to meet the remainder of Jacob’s higher education expenses out of their income in the future could potentially be addressed by investing an additional $563 per month now.
You can use a combination of savings, current income and loans to pay college bills, but relying on current income or loans alone can be very costly and burdensome. Remember that what you invest now can have an exponential effect on what you have to borrow or fund out of current income in the future.
- Start saving now — waiting even one year will cost you in the long run.
- You may not need to target the whole expense — income and loans can be used in the future, but the more you have saved, the less you’ll need to rely on these methods.
- Parents who have a full understanding of costs and are actively investing for the expense are better positioned to involve grandparents or other relatives who may help fund a college savings account.
- Remember that you can also use tax refunds, bonuses, etc. to make additional contributions to your account.
See how saving as early as possible and making meaningful contributions can help your college savings grow. Use the Price of Procrastination Calculator to see how much it could cost you for each year you wait.
1 Source: “Price of Procrastination Calculator.” Based on the cost for the 2014–2015 school year and assumes a 5% college cost inflation rate and a 6% annual investment return.
2 Source: “World’s Simplest College Savings Calculator.”
The charts shown above are for illustrative purposes only.
Please remember there’s always the potential of losing money when you invest in securities.
Withdrawal of earnings not used for qualified higher education expenses will be subject to federal and possibly state and local income tax and may be subject to an additional 10% penalty.