Like most grandparents, my parents and in-laws are convinced my 20-month-old son is a child prodigy. Every new word and new motor skill is followed by exclamations of ‘he’s so smart’ and ‘what a genius’ and they're ready to enroll him at Harvard or MIT next semester. While all this is perfectly normal ‘grandparent-tinted glasses,’ it did get me thinking about our college saving plan and what that might mean for someone entering college in 2033. I am fortunate enough to have graduated without accumulating any student debt thanks to my parents, which left me free to start working toward other financial goals like a down payment on a house and saving for my retirement, but will my children be as lucky? It was time to look at the numbers.
Now, there is every chance my son might actually be a prodigy and either get a full ride scholarship to whatever school he chooses or he could become a billionaire before he hits 18, but my wife and I have seen him try to eat out of the dog bowl and feel we could all benefit from a backup plan.
What will college cost for my children?
So let’s look at three cost predictions, one for private universities, one for in state residents at public schools, and lastly out-of-state residents attending public-colleges.
According to the College Board, the average cost of tuition and fees for the 2014-2015 school year was $31,231 at private colleges, $9,139 for state residents at public colleges, and $22,958 for out-of-state residents attending public universities.
Let’s assume that tuition rates continue to rise at an average of 5% per year, which is the 10-year historical average rate of increase according to The College Board(R). This table shows what college costs will look like in 18 years.
State resident public
Out-of-state resident public
Now, before you look at these numbers and declare your children ‘need not apply’ to anywhere out of state let alone a private school, it’s worth remembering that many students qualify for financial aid and/or receive scholarships which can have a substantial impact on these numbers.
When should I start saving for college?
So what does this all mean for your savings plan? Let’s say you have a 5 years old, and you’re ready to start putting aside some money each month for college. That gives you roughly 13 years of savings to prepare. If you commit to putting in $200 per month, every month, and you invest that money at an average market return of 7% per year by the time your little one enrolls in advanced astrophysics or the history of underwater basket weaving, your savings will have grown to over $50,000.
The most significant way that this number changes isn’t down to how much you save each month. It mainly comes down to time due to the magic of compound interest. Lets say Junior takes a long time to stop eating the paste and you wonder if he will ever go to college. Fast forward 10 years and his award winning science fair project is a nutritiously dense paste that will end third world hunger. Time to start saving. By now you have a 12-year-old and just six years to save. The same $200 per month will only get you to $18,000. However, if you start from day one, and save for a total of 18 years, your contributions will get you over $86,000, nearly enough to cover the entire bill of a state school.
So what have we learned?
So my overall thoughts after doing this research? I should have started saving from the day we found out we were expecting and maybe even a year or two earlier if my wife’s desires for 4 kids actually come to fruition. But, as my genius child is yet to invent a time machine, I’m just going to have to start saving from today. It seems the rule for college saving is much like the rule for retirement saving, if you didn’t start yesterday, start today.