How Much Should You Save for College?

A client’s former advisor told her that she should save $800,000 per child for college. None of my initial reactions to that were appropriate for a client meeting, but how much should you save for college is an important question for a lot of families so let’s dig into that.

First, why do advisors tell people that they need to save $800,000 per child for college? It’s because they don’t know how college savings works. They just hear that you want to send your newborn to private college, private college costs $80,000 per year now, and tuition inflation has historically been around 6%. Do the math and private college will cost about $200,000 per year when baby graduates from high school, so you need $800,000. And guess what? That means you need to save $2,000 per month, every month from birth to high school graduation.

My client, who has two children in daycare, a mortgage and various other normal obligations, was a little stressed about lowering her monthly 529 contribution given the monster nut she’d been told she needed to crack. And that’s unfortunate, because she’s doing a great job of saving and should feel successful about it, not stressed.

The Education Data Initiative’s College Savings Statistics shows that most  families save far less than $800,000 per child: the average savings target was $57,981, and the average amount saved in 2020 was $5,143, though many parents include contributions to retirement savings and other savings in this total.

If you saved $60,000, then you’d have $15,000 in savings each year. Add in a direct student loan and $4,000 from your income—a net amount of $1,500 if you’re eligible for the American Opportunity Tax Credit—and you’d have about the cost of a public university. To have $60,000 at the end of high school, you’d need to save $150 per month—which is much more likely to be possible than $2,000.

Here's the thing: Most families use a combination of savings, income and borrowing to pay for college. So first and foremost, you don’t need to save the full cost of college in advance. Second, no one has to pay $80,000 per year for college. Some choose to do so, but every student has a range of choices available to them at a range of price points.

So how much is enough? Enough is what works for your family. If your family can save $50 per month for college, that’s great. Hopefully somewhere along the way you’ll be able to increase that, but even if you can’t, saving $50 per month means you’ll have around $22,000 saved for college by high school graduation. Save twice as much each month-- $100—and you’ll have twice as much at college time.

When I said “enough is what works for your family” I also mean what fits your expectations of a college education. If you expect your student to go away for four years, $22,000 in savings might not be enough unless you can find creative pathways like dual enrollment or sizable scholarships, or pay quite a bit out of pocket. So think about how much is enough from the perspective of what you’re trying to accomplish, too.

Here's the other thing: If you’re a normal family, your finances aren’t totally linear. Having young kids at home is expensive between childcare expenses, diapers, all the things that need to be replaced with a larger size every 10 minutes, and the havoc that parenting littles wreaks on careers these days. So give yourself a break if you’re not able to save $2,000 per month per child! Chances are good that you’ll have opportunities to do more as your kids grow up. Taking the above example of $50 per month, if you were able to add another $50 per month when the student started kindergarten, you’d have over $6,000 more in savings when they start college. Add another $50 per month when they hit high school and you’ve got another $2,000. Maybe you have some periodic windfalls along the way—bonuses, gifts, tax refunds—that allow for a few lump sum contributions, too.

Families often ask how to balance college savings and retirement savings. If you’re asking my permission to reduce your retirement savings, sorry, you’re not going to get it. My rule of thumb is this: If you’re maxing out retirement savings and have adequate emergency savings, then go ahead and throw as much into college savings as you want. If you’re not maxing out retirement savings, then you should contribute no more than 10% of what you’re putting into retirement to college. That means if you’re saving $10,000 per year for retirement, your maximum college savings amount should be $1,000. If you want to save more for college, increase your retirement savings too.

Finally, here’s the key to being successful at saving: Be intentional about it. There’s a reason I use monthly savings numbers: you should set up a monthly deposit into your 529 account. You shouldn’t just think you’re going to get around to making a deposit every year. Automating your contributions means they actually get deposited into your 529 and that money doesn’t get spent on anything else.