Saving for College: How Much and How Early?

Start with the cost of a year today, including tuition, housing, food, books and travel. Then grow it by an assumed yearly increase. For example, $25,000 a year growing 4% a year for 10 years becomes $37,006 in the first year of college and about $157,145 over four years. Costs vary widely by school and can change faster or slower than assumed.

Suppose the goal is $100,000 and savings earn 6% a year (compounded monthly, deposits at month end):

Starting when the child is born needs about a fifth of the monthly amount required with five years to go, and you pay in about $30,000 less, because growth does much of the work.

Families often combine several sources: savings, current income, scholarships and grants, work-study, and sometimes loans. Deciding what share to cover by saving lets you set a target that is realistic. Even a partial fund reduces borrowing.

Some countries offer tax-advantaged education savings accounts. In the United States, 529 plans are a well-known example, with rules that differ by state and that can change. The College Savings Plans Network at collegesavings.org is one place to start. Whatever you use, check fees, investment options, eligible expenses, and what happens if the money is not needed for education.

• Waiting for the “perfect” moment to start. Start small and increase later.
• Ignoring living costs and focusing only on tuition.
• Assuming a high return without considering risk.
• Saving for college at the expense of an emergency fund or your own retirement.

1. Estimate the future cost and decide the share you want to save.
2. Use the calculator to find a monthly amount.
3. Automate the deposit and raise it when income rises.
4. Review each year against the plan.

See also student loan payments explained.