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Paying for College: How Much Is Enough?

When you’re a parent, the worries that keep you up at night are seemingly endless. They range from the little stuff like choosing between T-ball and gymnastics to the big stuff like going to school and how much to save for college.

If you’re worried about T-ball and gymnastics, college probably seems like a long way off. But the things you can do now (especially while your kiddos still have their baby teeth) will definitely pay off later.

Listen: Saving for college doesn’t have to be stressful. You can send your kids off to school without debt, student loans or private loans. You just need to learn how much you should save for college so you can start now—no matter where you’re starting.

Here are some basic steps you can follow to start saving for your kids’ college: 

  1. Calculate the Costs
  2. Have a Realistic Goal in Mind
  3. Start Saving as Early as Possible
  4. Save in the Right Place
  5. Consider Your School Options
  6. Don’t Forget About Scholarships and Grants
  7. Say No to Student Loans

Let’s start by calculating the costs.

1. Calculate the Costs

In order to know how much to save for college, you need to know what it costs. The costs are different from school to school, whether it’s private or public, in-state or out-of-state.

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For the 2020–2021 school year, here are the estimated tuition costs, plus room and board, books and supplies, transportation, and other personal expenses for U.S. colleges based on the type of school:1 

  • Public, Two-Year College: $18,550
  • Public, Four-Year, In-State College: $26,820
  • Public, Four-Year, Out-of-State College: $43,280
  • Private, Four-Year College: $54,880

These costs are known as the sticker price. This is what you’d pay without any scholarships or grants. But those numbers don’t include the “real” extras—things like laundry, parking passes (or tickets), gas money and those late-night coffee runs.

But those are today’s estimated costs. So, what if your son is still learning his ABCs and eating paste? How will you know how much to save for college for the day he turns 18? Don’t worry—you don’t have to be a math professor to know the answer.

All you need is the average college inflation rate and a good online college cost calculator—like this one. As for the college inflation rate? It depends on the year.

The numbers have ranged from 3.47% in 1978, all the way up to 13.44% in 1982, and all the way back down to 1.38% in 2020.2 But between the years 1977 and 2021, the average college inflation rate landed around 6.37% per year.3 

Because inflation rates can vary by year, we suggest setting the rate in that cost calculator to 5%. And as for how much you plan to cover from savings? Go ahead and set that to 100%—student loans are a big no-no.

Here’s an example: Jack and Beth have a 10-year-old daughter. That means they have eight years until she’s 18 and off to that public, four-year, in-state college. Using the college tuition calculator at 5% inflation, they’ll need to save $39,625 for her freshman year and $170,790 total.4  

2. Have a Realistic Goal in Mind

If your blood pressure is a little high right now, take a deep breath. That total may not be how much you’ll actually pay. Remember: Every family’s financial situation is different, so you need to be realistic about how much you can contribute to your kids’ college expenses.

If you’re up to your eyeballs in debt and retirement is only 10 years away, your college savings goal will be different than a couple in their 30s who are debt-free and already putting 15% of their income toward retirement every month.

If you’re married, you need to sit down with your spouse and look at your financial situation. What are your long-term goals? How much debt do you have? What’s your plan for getting rid of your debt? How much have you saved for retirement? Can you put money toward retirement and put money away for college expenses? Don’t hold back on retirement savings just because Junior wants to go to an Ivy League or out-of-state school.

These questions will help you determine how much to save for college. Once you have answers to these, it’s time to set a reasonable goal. Yes, you want to help your children. But you may not be able to pay for all of it—or any of it. And that’s okay. There are other options for covering college expenses besides the Bank of Mom and Dad or student loans. But more on that later.

3. Start Saving as Early as Possible

We talk about the importance of putting money away for retirement as soon as possible. That’s because time plays a major role when it comes to compound growth. If you put money away as soon as your child is born, you have almost 20 years of growth potential—and you don’t have to invest as much each month.

If you put away just $100 a month from the year your child is born to the year they turn 18, you could have over $60,000 for their college fund. But if you wait until they turn 10, you’d have to save $400 a month to reach that same $60,000. Which is easier to afford? It doesn’t take a rocket scientist to answer that question!

4. Save in the Right Place

Now, people often ask where to put the money they’re investing for their kids’ college. The two most common options are the 529 plan (named after a section of the IRS code) and the ESA (Education Savings Account).

These two options are similar in one important way: The money in the accounts grows tax-free and isn’t taxed when it’s taken out—as long as the money is used for qualified expenses.

Here’s the bottom line: You want to stay in the driver’s seat with your money, whether it’s in a 529 plan or an ESA. If you go with an ESA, you have more control over how you invest it, but 529 plans are beginning to offer more flexibility. Here are the account features at a glance:

529 Plan

  • No age limit for using it
  • No income restrictions
  • Contribution limit of $14,000/year
  • Withdrawals for college expenses only
  • Nonqualified withdrawals are taxed

Education Savings Account (ESA)

  • Must be used by age 30
  • Can be used for primary/secondary education
  • Has income restrictions
  • Contribution limit of $2,000 per child/year
  • Nonqualified withdrawals are taxed

Whatever you do, don’t go with a prepaid tuition plan. There are lots of restrictions involved, and over the long haul, you’d get more bang for your buck by investing that money instead of locking in a tuition rate. Trust us, just don’t do it.

P.S. Before you start saving, talk with a financial pro in your area about which plan is best for you.  

5. Consider Your School Options

Not all schools are created equal, especially when it comes to price. But when you’re interviewing for a job, most bachelor’s degrees are pretty much on equal footing. An HR manager is looking for skill set and experience, not whether someone went to an Ivy League school or how much they paid for their degree.

Have a heart-to-heart with your kid early on when they begin showing interest in certain schools they might want to go to. Let them know exactly how much money you can contribute. Talk about how far that money will go considering each of the school options: public versus private, in-state versus out-of-state, community college versus university. All of these choices matter when it comes to the price tag.

Some states, like Tennessee, offer two years tuition-free at a community or technical college to all high school graduates. That means the first two years of your child’s college career could cost you nothing in tuition. Score!

Don’t live in Tennessee? Do some research and see what your state has to offer. Some colleges freeze the tuition rate, meaning your child will pay the same amount in tuition as long as they go there. Others won’t let your young adult live off-campus as a freshman, so you have to cover the room and board costs. Doing your research will definitely pay off.

6. Don’t Forget About Scholarships and Grants

For a lot of Americans, thinking about the cost of college is stressful. And if you’re in that boat, you might be forgetting about a little ray of sunshine called scholarship and grants—also known as free money.

But here’s the catch: You have to complete the FAFSA (Free Application for Federal Student Aid) every year—and every state has its own deadline for completion.

The FAFSA is used to figure out how much you can get in federal grants (such as the Pell Grant) and state grants. Even if you think you make too much money, do it anyway. Many colleges, foundations and corporations use it to award scholarships.

Filling out the FAFSA probably isn’t how you’d like to spend a rainy afternoon, but if you don’t, you might be leaving cash on the table. A third of undergrad students don’t file the FAFSA, and of those, 2 million would have qualified for a grant!5 Spending a day filling out these forms sounds worth it now, doesn’t it?

In addition to grants, you need to go after all the scholarships you can. We repeat: all the scholarships. And in today’s digital age, apps like Scholly and websites like CareerOneStop make finding and applying for those scholarships much easier. So, there’s really no excuse for not going after every penny you can find.

7. Say No to Student Loans

When you complete the FAFSA, you’ll start getting offers from banks that will be more than happy to “help” you pay for college. In fact, some financial advisors actually tell their clients to count on paying for part of their college expenses with student loans. Listen, it’s this advice that has led Americans to carrying around 1.58 trillion in federal student loan debt.6  

Bottom line? Debt is a threat to your kids’ financial futures. Student loans only help your kids start out in the negative. But get this: Going through college debt-free really is possible.

These lenders claim they’re more than willing to “help you out.” Let’s look at the real costs of that so-called student loan help. In 2020, the average student loan borrower carried about $38,792 in student debt.7

So, what will paying off that debt look like?

Assuming you have a 10-year payment plan and an interest rate of 6%, you’d be paying just over $400 a month. And throughout those 10 years, you’d pay almost $13,000 in interest. So, that “help” in the form of a nearly $39,000 loan cost you almost $52,000. If you do the 20-year payment plan, you’d pay only $278 a month, but you’d end up paying close to $30,000 in interest—almost the original loan amount! Paying nearly double for a degree? No, thank you! 

A Debt-Free Degree Is Possible

Even after applying for grants and scholarships, your young adult may still have to pay out of pocket for some of their college expenses. That’s okay! With some skin in the game, they’re more likely to work at those scholarships and grants, graduate sooner, and develop a strong work ethic. 

If you want your kid to get through college without student loans, pick up a copy of Debt-Free Degree. Bestselling author and Ramsey Personality Anthony ONeal will show you how to save for college step by step. He’ll give you and your kids what you need to know to prepare for college, what classes to take, how to do college visits, and even how to choose a major. Check it out.   

Get Help From a Pro!

When it comes to saving for college, you don’t have to play a guessing game. There are financial professionals in your area who can help. Our trusted SmartVestor Pros are the best in the business. You can trust them to help you navigate the waters of college savings any day. Sign up here and we’ll match you with a pro in your area—for free.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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