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Paying for College—How Much Is Enough?

That dreaded expense—a college education. It may keep you up at night, especially if you have more than one child. How in the world are you supposed to save enough money to pay for that degree? And what about if you’re still trying to get out of debt or put away enough for retirement?

If you feel the pressure, you’re not alone. Every parent wants to be able to provide the best for their kids. The good news is that paying for college doesn’t have to be a nightmare. You can sleep easy once you have an estimate of how much money to shoot for and have an action plan in place. Here are some basic steps you need to follow to make paying for college a little less painful to your wallet:

  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 school options.
  6. Go after scholarships and grants.
  7. Say no to student loans.

Let’s talk through the steps. Then you can get some rest tonight.

Paying for College: Calculate the Costs

Before you make a plan to pay for college, you need to know how much you’re looking at. Yes, the costs vary from college to college, but you can come up with a rough estimate. Every year, The College Board releases statistics on college pricing.(1) For the 2017–2018 schoolyear, here are the average tuition costs, plus room and board, for U.S. colleges based on type of school:

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Public, Two-Year College: $11,970
Public, Four-Year, In-State College: $20,770
Public, Four-Year, Out-of-State College: $36,420
Private, Four-Year College: $46,950

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 extras—things like books and supplies, laundry, parking passes, gas money, and late-night coffee runs.

Those are today’s costs, likely what you would spend if you were paying for college this year. But what if your child is still in elementary school? How do you figure out future college costs?

By calculating in the average yearly increase.

The College Board estimates roughly a 3% increase year over year.(2) So, go online and find an inflation calculator. Set the rate to 3% annually and the calculation period to match the number of years until your child goes to college. The calculator will tell you the future cost.

Let’s look at an example. Jack and Beth have a 10-year-old daughter. That means they have eight years until she goes to college. Here’s how the numbers work out if she went to a public, four-year, in-state school:

Paying for College—How Much Is Enough?

In eight years, the cost to attend a public college in their state could be about $26,300, not including all the extras. The couple now has a ballpark figure for how much their daughter’s college education could cost.

Are you still with us? Good. Because this is important stuff.

Paying for College: Have a Realistic Goal in Mind

Once you have a ballpark figure in mind, we want you to set it aside for a minute. That might not be how much you’ll pay for college. 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 is 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? You don’t ever want to skimp on retirement savings because Junior wants to go to an Ivy League or out-of-state school.

These questions will determine how much money you can put toward your kids’ education. 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. More on that later.

Paying for College: 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!

Paying for College: 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
  • Non-qualified withdrawals are taxed

Education Savings Account (ESA)

  • Must be used by age 30
  • Can be used for primary/secondary education
  • Income restrictions
  • Contribution limit of $2,000 per child/year
  • Non-qualified 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 steer clear of this option.

Before you start saving, we highly recommend talking with a financial pro about which plan would be best for you.

Paying for College: Consider 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 or not someone went to an Ivy League school.

When your child starts talking about the school they want to attend, it’s time to sit down for a heart-to-heart. 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. Have this talk with your kids before they’re in high school and get emotionally attached to a particular school.

Some states, like Tennessee, offer two years tuition-free at a community or technical college. Translation? The first two years of your child’s college career could cost you nothing in tuition. Yeah, we're jumping all over that.

Don’t live in Tennessee? Do some research and see what your state has to offer. Better yet, look into the tuition details of the schools your child is considering. 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 pay the room and board costs. Listen, people, researching your school options matters!

Paying for College: Go After Scholarships and Grants

For a lot of Americans, thinking about the cost of college can cause a lot of stress. But remember this: The price a school quotes for a year’s tuition isn’t the amount most students pay. In fact, this year over 88% of freshmen and almost 80% of all undergrads got grant aid that covered more than half of their tuition and fees.(3) Yep! 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 completing it.

The FAFSA is used to determine how much you can get in federal grants (such as the Pell Grant) and state grants. Even if you (or your child) make too much money make sure to complete the FAFSA. It’s also used in awarding scholarships from colleges, foundations, and corporations.

Filling out the FAFSA probably isn’t how you’d like to spend a rainy afternoon, but if you don’t, you may be leaving cash on the table. Only 60.9% of the class of 2018 filled out the FAFSA. For those who didn't, it cost them an average of $14,400 per student.(4) Filling out that form sounds worth it now, doesn't it?

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

Paying for College: Say No to Student Loans

When you complete the FAFSA, you’ll start getting offers from banks that will be more than happy to lend you money to pay for college. In fact, some financial advisors actually tell their clients to count on paying for some of their college expenses with student loans. That’s a bad idea! Debt is a threat to your kids’ financial future. You don’t want them to start out their adult years in the red with a bunch of loans hanging over their head. And getting through college debt-free is absolutely 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 2016, about 70% of college seniors borrowed money for their education, and they graduated with an average of $37,000 in student debt.(5)

So, what will paying off that debt look like?

Assuming 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 $37,000 loan cost you almost $50,000. If you do the 20-year payment plan, you’d pay only $282 a month, but you’d end up paying $30,000 in interest—almost the original loan amount! Paying nearly double for a degree? No thank you! It doesn’t seem very helpful to put somebody in a deep hole right out of college.

How Much Is Your Student Paying for College?

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. Work isn’t a four-letter word!

If you haven’t talked to your spouse or loved ones about your kids’ college education, the time to start is now! And to help you make the best decisions, we recommend meeting with a financial advisor to explore your unique situation and create a plan that works for you. Then you can look forward to the future knowing your kids’ future is bright, too.

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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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