Simple but Important Calculation: How Much Should You Have Saved for College Today?

by Darwin on May 12, 2010

While not all parents agree on which type of college their kids should attend, how much of the cost they should front, or whether a college degree is even worth the immense upfront expenditure at all, what is virtually unanimous is that given recent trends in tuition it’s a terribly expensive undertaking that will likely worsen over time given other developments in the economy, endowment investment losses and other economic factors.

According to the inflation trends at the College Board, the average annual increase over 10 years was 6.5% for a 4 year public college while increasing 5.2% at private colleges.  Meanwhile, core inflation, wages, or whatever other measure of purchasing power you consider to be relevant was much lower – in the 1.5-3% range.  Therefore, the cost of college in real dollars has been increasing substantially each year at virtually double that rate, and if you have a child born this year, it’s entirely plausible this painful trend will continue unabated for the next 18 years.  Over time, the power of compounding is sure to make the college experience daunting to those who didn’t adequately prepare in advance.

There are myriad assumptions and calculations out there for how much you’ll need to save for college, but given the wild swings in outcomes of various investment classes, assumptions surrounding which college costs to assume and hundreds of other variables, what I’d offer is a very basic high level set of assumptions that will allow you to immediately get an idea of how much money you need either for a new child or how much you should have saved (and will need to make up) for a child approaching college age:


  • Child attends college at 18
  • Child attends 4 year public or private school – for estimate use 2010 average of $15,213 for public and $35,636 for private
  • Money is invested in a typical tax-advantaged college plan like a 529 or ESA
  • Returns on investments are roughly equivalent to college cost inflation – This is a key assumption and I’ll explain below why I used it

Now, there are a few assumptions that you are your children need to discuss during the college selection process, and these may change along the way as well.  First off, is college even appropriate for your child?  For many, the answer is yes.  However, let’s say your child just didn’t excel in school, didn’t enjoy it and barely got by…but perhaps they love a particular trade that may provide a decent income in adult life?  College isn’t for everyone and there are perfectly successful and content workers and entrepreneurs that don’t have college degrees.  Once that question is answered in the affirmative though, the next consideration is what burden of the total costs are to be borne by the child versus the parent.  If you tell your kid, “You can go to whichever college you like, but we’re only able to provide for $15,000 per year (in 2010 dollars) and you’re on the hook for the rest”, chances are they’ll opt for a state school.  If you want your child to be able to attend any school they want and you’re doubtful they’ll be the recipient of a scholarship or any sort of aid given your income (this is the most conservative assumption), then you’d better plan for the bull $36K/year in today’s dollars.

For the assumption on investment returns, there are a few factors at work here.  First off, while the long-term return on stocks is generally touted at 8-9% annually, the reality is that this is not guaranteed, and also, you’ll likely want to adjust your asset allocation to shift into more conservative assets as your child approaches college so as to not see your plan drop in value by 50% in a blink of an eye like we saw across 2008-2009.  For instance, perhaps at age 1, your child’s plan is invested fully in stocks, but by 14, you’re down to 65% stock and 35% bonds/money market.  Therefore, even with a rosy 8% assumption, given this asset switch along the way, your real returns through the life of the term are probably closer to the annual college inflation costs.

Now, you might say these assumptions are way to simplified, broad and back-of-the-napkin.  Well, maybe they are.  And maybe you’ll want to spend the next 3 months tracking down a financial adviser who’s going to charge you a lot of money (either upfront or from fees by putting you into investments in which they derive fees) to tell you something different, but at least here, you’ve got a start.  You have an order of magnitude wake-up call on just what it’s going to take to put your kid(s) through college.  Start today with this goal in mind as opposed to trying to find someone who’s going to tell you something you’d rather hear – that it will be cheaper, how to get scholarships, or whatever sounds better than these large numbers.

What Happens if You Saved Too Much?

While this is hardly a common problem since even these costs are likely underestimated and adjustments could be made along the way, the beauty of the 529 College Savings Plans is that there are several alternatives at your disposal if you encounter that situation ranging from using the money for another child to various options for withdrawal (see 529 Plan Basics for more details on this and which plan we’re using).

How Are We Doing?

In looking at it this way, we’re behind the 8-ball a bit.  While we do have several thousand dollars save for each kid, we have three kids and we want the ultimate flexibility (most conservative assumption) of a top private college with no assistance, we’re talking about saving $428,000 in today’s dollars.  That’s a staggering amount!  It’s another mortgage (way more than our current one by the way) but to be paid in half the time!  Our actual plan involves my wife returning to the workforce once our youngest is out of the house and into school and having my wife’s salary to virtually do nothing but shovel money into college accounts.  But that’s taking on a bit of risk in assuming they’re hiring teachers again in a couple years and no other lifechanging events occur.  So, admittedly, it’s daunting for us as well, but we’ve got a plan, we’ve got a backup plan, we’ve already started investing for each child, and I know what we’re up against.

How Do You Stack Up?

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{ 9 comments… read them below or add one }

1 Investor Junkie May 12, 2010 at 10:59 pm

Ugh going through the same planning with my three kids. I need to run a monte carlo simulation with different returns to determine the chances of getting the proper amount saved for college.

My comments:
In my state (NY) we get a tax deduction for up to 10k invested jointly. So I’ve decided to only invest up to 10k for all three children. After this I plan on investing in US Savings I Bonds and putting money into our Roth IRA accounts (since they can be used penalty free for higher Ed)

You are correct that some children may not go to college. So I would rather have our Roth IRA fully maximized and more general purpose I Bonds. In addition your retirement savings should always be funded first before college education.

Finally based upon other asset allocation monte carlo test I don’t think it’s ever wise to be 100% in stocks.


2 Investor Junkie May 12, 2010 at 11:59 pm

The other factor to consider is financial aid. Unfortunately the more money in 529 the less likely you’ll qualified. 401(k)s and IRAs do not count.


3 Earn Cash Now May 13, 2010 at 2:04 am

There is one tool that is great for wealthy people to use and even non wealthy people. that tool is a whole life insurance plan with additional premiums. Just make sure it doesn’t MEC. If you can do this you can store lots of cash away and since the money is in a life insurance contract it is excluded on the FAFSA financial aid form. There is no better way to save and grow the money then in a whole life contract. Currently the only company I would recommend doing this with is Northwestern Mutual.


4 Budgeting in the Fun Stuff May 13, 2010 at 12:24 pm

Wow…now I know why my parents didn’t pay my whole way. Of course, my whole 4 year degree “only” cost about $50,000 from 2001-2005.


5 Money Reasons May 15, 2010 at 9:28 am

Yeah, I feel your pain! I have $40,000 saved in a 529 plan for my son (9 year old) and a comparable amount for my daughter age (she’s 6), but by the time they are read to start college, I’ll still be short…

I’m really hoping for scholarships (my sister had a few of these), and if that doesn’t do it, financial aid. In the mean time I’ll keep pumping money into their accounts (no wonder I’m so frugal…)!


6 Elliott May 15, 2010 at 8:23 pm

Two words: community college (full disclosure: I’m a prof at a California 2-year). Why spend the kind of cash that has been so well outlined in this article so that your kids can sit in an auditorium with 300 other undergrads while an overworked TA goes through a one-size-fits-all presentation on [insert subject here]? That same class is being offered at half the price (maybe less – in some states rates are as low as $25/credit hour) by an experienced professor with a PhD. Don’t believe Hollywood’s latest caricature of community colleges. There is quality teaching going on at your local 2-year institution. And don’t assume that just because a university has a great reputation and a fat endowment that the teaching of freshmen and sophomores is anywhere near the top of their priority list. True, the experience of dorm life is not possible at most 2-year’s. But I had that dorm experience, I’m still paying the student loans incurred getting that experience, and I can tell you that the experience is not worth the money my children and I will be asked to pay for that experience in 10-15 years. And true, there are students at community college that are struggling to figure out their direction in life. As someone who was an overworked TA at a large private research university, I can tell you that the amount you pay in tuition has very little to do with the academic motivation and prowess of the students in attendance. The value of doing the first two years at a community college would be hard to understate.


7 Aury (Thunderdrake) May 24, 2010 at 10:40 pm

For what homes cost today, it’s quite brutal. Staggers me to see the amount just to go to school…

…Makes me glad I decide to pursue entrepreneurship, self employment and writing…


8 feistyboysmama June 25, 2010 at 10:04 am

We are aiming to save about $40,000 for my son’s education. That is about half of what it will probably cost for him to spend 4 years at a state school. He’ll be responsible for coming up with the rest, and if he wants to go to private school, he’ll have to make up the (considerable) shortfall with scholarships, loans, etc. Even having $40,000 for his education will be better than what his dad and I had when we went to school – at the time I went to college in 1994, my parents had saved about $2,500 for me, which was gone after my third semester at a small state school. My husband had $0 from his family – he had to work the entire year before HS graduation (including working 2 jobs that summer) to even save the expenses to move to college; his mom was a single mom and a teacher, and needed the money he earned to support the household. Both of us worked multiple jobs while we were in school, in addition to working summers. My husband dropped out twice to work full-time for a semester to save enough money to go back; I worked three jobs for a couple of semesters (college newspaper, city newspaper as a stringer, and in the college’s food court). We both got academic scholarships and maintained them; my husband was able to get a few grants. Other than that, what money we had, we worked for. We both got our undergrad degrees and my husband got his master’s degree, when it was all said and done. When we got married we had less than $15,000 of loans total, which we paid off with an inheritance shortly after we got married.

In our state, anyone who graduates from a state high school with a 3.0 GPA can go to a state school for free tuition; they just have to cover books and living expenses. I was not eligible for this “free ride” when I graduated; my younger brother was. He washed out of school within three semesters having cost my parents a few thousand dollars in expenses. When you don’t pay for something, I think you have less investment in it.

We are putting my son through a moderately-priced, religious pre-K through 12 private school. And we are trying to save more for retirement, now that our 401Ks were decimated in the 2008 recession. Let’s face it – the crash of the economy put a lot of us way behind where we need to be financially. My husband lost his job just prior to his 401K at his old job vesting, which cost us thousands. We would love to save hundreds of thousands for my son’s college, but it’s not going to happen. We need to make sure we’re saving enough to cover our retirement and old-age expenses, because we can’t get loans for that. We also want to be able to live a nice life, taking vacations, living in a “good” area, etc. We don’t have an expensive house or drive new cars, but I can’t see living in penury for 20+ years so that we can save hundreds of thousands for an education my son may or may not decide he wants. At the end of the day, there’s always Western Governor’s University online and he can live at home – he’ll still end up with a degree, and we can get him a gym membership for $30 a month to make up for the Club Med-style amenities most colleges seems so focused on these days.

People with sufficient determination get where they want to go – they figure out how to make it happen. My husband I did, anyway. My son is smart, and he will too. I wouldn’t be upset, frankly, if he skipped the four-year degree and went for something else where he could be more assured of earning a living. We have a friend who’s an electrician – never went to college – and makes more than my husband and I put together. At the end of the day, education is about the ability to earn a living, and I don’t see a lot of colleges focused on that any more.


9 Bdahl July 2, 2010 at 7:03 am

Make a shift to your thinking, I am one of those advisors that gets paid to do this for a living. I would not think about how to save for college, but rather ” how to pay for college”. Don’t use 529 plans or savings bonds, they count against you in your expected family contribution EFC or FASFA. 5.6% if in your name, 20% in the kids name. Load up on everything that is “hidden from” the fASFA form.
401k, IRA, Cash Value Life, especially a Roth. Make yourself look poor to the government. Then you will qualify for more aid, grants. When you get to college shift your savings around and pay part from your cash flow, part from Roth, Grants, Aid, Loans and make the kid work and contribute $3000 a year. If you piece it all together, you might have to work a year or two longer before you retire, but you will not strap your kids with 100+ thousand in debt. Just saved you all $900 dollars, which is what we charge for the planning.


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