How much, and how early, should I save for my child’s education?

The next generation of students will likely turn to federal grants, scholarships, financial aid and student loans to help pay for college. However, not all students will qualify for grants or scholarships (primarily based on merit) or for financial aid (based on financial need). Student loans can be a viable option but leave you and/or your child burdened with debt that can be as large as a mortgage. A better plan is to save as much as you can and start early.


Danger of Delaying Savings

Although you can start saving for college at any point, the power of compounding makes it much more advantageous to start early. Monthly investments can grow over time, meaning small contributions over a long time period can reach the same or greater value as larger contributions over a shorter time. Let’s look at the impact that starting earlier can have on your college savings.

The chart below compares the results of starting a hypothetical college savings plan at three different times: when your child is born, at age 5 or at age 10.

STARTING TO SAVE EARLIER CAN REAP BENEFITS

As the chart shows:

If you contribute $350 per month to a college savings plan starting when your child is age 10, you could accumulate $42,900 by the time your child is age 18. If you start when your child is born, you could save $135, 574.

The same advantage holds if you’re saving with a set ending value in mind — perhaps the anticipated cost of tuition at a particular college. To save $150,000 by the time your child turns 18 would cost $1,221 per month if you start when the child is 10. It would cost only $387 per month if you start when the child is born.


Costs Are Increasing Quickly

While the value of a college education continues to rise, so does the cost of achieving this education goal. Long gone are the days when students could pay their own way through college, as increasing college tuitions are continuing to rise at staggering rates even after accounting for general inflation.

The chart below shows the current (2013-2014) and projected future average costs of a four-year education at public and private colleges in the US.

THE TOTAL COST OF A FOUR-YEAR EDUCATION WILL LIKELY INCREASE SUBSTANTIALLY OVER TIME

The average four-year cost of sending a child to a private college now (2013-2014) is approximately $160,000.

The average four-year cost of private college will likely be close to $390,000 for a child born today. With costs going up so rapidly, it’s becoming even more important to begin saving early and get the power of compounding working for you.

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