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When parents first start trying to decide how much to save, they often get overwhelmed by the cost of a college education. According to the Bureau of Labor Statistics, tuition increased by 8% per year, on average, from 1979 to 2001. This means that children born today will face college costs that are 3 to 4 times current prices. For example, this means expenses to attend a four year college could total $300,000 by the time your child is of college age (keep in mind this estimate is based on your child attending the highest priced college or university).
As far as how much to save, don’t worry about saving the full amount! Use the one-third rule as a rule of thumb. The rule states that you should expect to:
- Save one-third of the expected college costs,
- Pay one-third from current income and financial aid during the college years, and
- Borrow one-third using a combination of parent and student loans.
Essentially, one-third will be coming from past income (savings), one-third from current income, and one-third from future income (loans). This lets you spread the cost of a college education over an extended period of time.
Other good rules of thumb for deciding how much to save include:
- Save at least 10% of your paycheck (per child), starting the day the child is born.
- Save 10% to 15% of each year's college costs (per child), starting the day your child is born.
- Save at least $2,500 per child per year from birth (about $50 per week).
The more you can save, the better off you'll be. Saving just $25 a week from birth to age 17 at 5% interest will yield almost $35,000 – a nice college fund!
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