If you are one of the nearly 45 million Americans with student loan debt, then you know how expensive college is and how much that student loan debt can hurt your financial plans. Knowing those facts leads many parents to ask how they can help their kids reduce their future financial burden by starting to save for college. And more specifically, many parents want to know how much to save for college.
While I don’t have children (yet), I did have student loan debt. I also know that student loan debt can set your financial goals back years… so I completely get wanting to save for college.
But, the problem that many parents face is that college tuition rates continue to rise, which makes it difficult to know exactly how much they should save in the first place. The other issue is that many parents see saving for college as such a large financial goal that they don’t even know where to begin and many are already behind on saving for college.
First, your own finances should be in check before saving for college
I’m not one to give hardline blanket statements about other people’s finances, but this is one that I feel pretty strongly about. And sure, there are ways to save a little while getting your finances in order, but you are priority number one.
You know that oxygen mask analogy? Put yours on first before helping anyone else. I’d say it still applies to saving for college.
If you have high-interest rate debt, it will continue to grow and grow if you don’t focus on paying it off, and you can’t take out a loan for retirement.
Even something like having an emergency fund is an important first step to take before trying to save for college. Eliminating your debt, saving for retirement, and creating a better financial present and future are for you. It’s not selfish – all of these things teach your children valuable personal finance lessons and are a step towards passing on generational wealth.
With all of that being said, I’m not saying that you can’t throw some money in one of the college savings accounts I’m going to bring up in a minute while also getting your financial house in order. However, I would prioritize your own financial needs before getting really serious about how much to save for college.
Saving for college doesn’t mean you need to save 100% of the cost
Any amount you contribute to your child’s college education gives them an advantage. You might only be able to save enough to help them with books, a class or two per semester, whatever.
In addition to the rising cost of college tuition, there are also a ton of what-if factors that make it difficult to pinpoint exactly how much to save for college in the first place. I’m talking about things like scholarships, what school your children will attend, and whether they decide to go to a trade school rather than a four-year university.
Whatever you save and whenever you start, you are giving your children valuable options and opportunities.
The 1/3 rule for saving for college
If you are looking for specific college savings guidelines, the 1/3 rule is a good place to start understanding how much to save for college. The 1/3 rule assumes that the cost of your children’s college education can be split in three ways:
- ⅓ comes from saving for college
- ⅓ comes from current income (at the time of college)
- ⅓ comes from future income (loans)
Like most major expenses, your home for example, college tuition is rarely paid for in one lump sum. I don’t think you’d be reading this article if that was even an option. The 1/3 rule means you would only being saving a third of the cost of college for each child. And even if you can’t cover another third with your income while they are in school, what you will have set aside is still a significant amount.
How much to save for college
Now to the serious business of knowing exactly how much to save for college. While there is no way to know the exact amount, there are some ways to understand what that total might look like. This will be helpful if you plan on following the 1/3 rule, are trying to save 50%, or some other portion.
College savings calculators
There are tons of online college savings calculators that take a bunch of the guesswork out of knowing how much to save for college.
Fidelity has a great college savings calculator that factors in the following things:
- Your child’s age
- How much you’d like to save
- What you already have saved
- How much you are currently saving
After you complete each field, you can see how saving certain amounts per month will help you meet your college savings goals. Vanguard has a really comprehensive college savings calculator if you want to play around with a couple of different options.
How to save for college
Okay, you’ve got a number in mind of how much you need to save and maybe even an idea of how much you should save each month. Now, you can think about how you’ll make those college savings goals happen. In a minute I’m going to give you some college savings fund options so you know where to put that money.
Break your savings into smaller pieces
Like any large savings goal, creating smaller goals will make that full amount a little more approachable. Most of the college savings calculators out there will give you a monthly savings goal, but you can still break that down even more.
If you’ve just had a baby and know that you need to save $500 a month to fund half of your child’s future college expenses, that would be $125 per week. That might sound more manageable, especially if you think about it as something that can be achieved by eliminating a couple of dinners out per week and cutting cable.
Bank your windfalls
A financial windfall is any unexpected financial gain. It could be what you get back on your taxes, work bonuses, an inheritance, or lottery winnings. By putting these amounts into your child’s college fund rather than spending them, you’ll be boosting your savings while likely reducing the amount in student loans your child will have to take out.
Increase your income
This is always going to be one of my top tips for saving more because it’s actually easier than it sounds. Increasing your income is also a good place to start if you are behind on college savings.
Running Facebook ads for small businesses is a great side income generator that requires just a few additional hours per week, while expecting to earn around $1,000 more each month – that’s serious college savings.
I started running Facebook ads for small businesses to help me pay off my student loan debt, but it’s definitely something you can do to get ahead of that debt. If you’re interested in learning more, I’ve created a comprehensive course to help you get started. Learn more at the Facebook Ads Side Hustle Course.
For more side hustle options to increase what you can save for college, read Our Favorite Types of Side Hustles from Laptop Empires.
Use automated savings apps to save for college
The goal of automated savings apps like Qapital or Digit is to take the sting out of saving money and make it easier by automating the process. These apps all work a little differently, whether by rounding up transactions or using algorithms to put the perfect amount into a savings account.
Automated savings apps alone probably won’t be enough to cover the full amount of how much to save for college, but they can boost your savings amount.
Upromise is another automated savings app that is specifically for college savings. They give you back a portion of what you spend at one of their partners (Macy’s, Home Depot, GNC, Apple, to name a few), and then help you transfer it into an account specifically for college savings or to even pay off your own student loans.
Involve your child in the college savings process
This is money for your child, and saving for college is going to be a huge factor in their financial life. Talking to them about how they can help should be an important part of how you save for their college education.
You could involve them in the process by matching what they save for school, helping them find scholarships, and encouraging them to look into community college. Another thing many parents overlook is that some kids won’t go to a traditional four-year university. There are great jobs out there that require trade school rather than college. Talking to your children about what they want to do will help you both understand what to save for college and how you’ll do it.
College savings plans
Now that you know how to save for college, here some of the best places to put that money.
529 plans are savings accounts that offer tax and financial aid benefits that help you save for college. Nearly every state has a 529 plan and the money you save in an 529 can be used to cover qualified college expenses, like tuition, room, and board. 529’s are simple to open and easy to make contributions towards.
You can set these up as early as birth, and one idea for college savings is to ask family members to make contributions to your child’s 529 plan in lieu of or in addition to birthday gifts. The maximum contribution each year to a 529 plan is $15,000 per individual.
The tax benefits of 529 plans make them really appealing to parents because 529 plans grow tax free. Many investment brokerages offer 529 plans, and you can see if your state offers them and where to 529 plans here.
ESA stands for Education Savings Account, and it’s a little different from a 529 plan. Here are a few things to know about a Coverdell ESA:
- $2,000 annual contribution limit
- Contributions are made on an after-tax basis, similar to a Roth IRA
- You can not make contributions after the beneficiaries 18th birthday
- It can be used to cover qualified college expenses
- It phases out individual taxpayers with a modified annual gross income of $95,000
- A Coverdell ESA lets you control how you invest your college savings
- You can set them up through most brokerages
My final word on how much to save for college and how to do it
I am very serious when I say this: You can start saving for college at any time and any amount helps. Whatever you do will give your child an advantage that helps them reduce their student loan debt while possibly setting them up for future financial success.
I also solidly believe that your financial future is more important than that of your children’s. Even though I don’t have any yet, I won’t expect my children to cover my expenses when I’m older… that’s on me and my wife.