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Here\u2019s something we all know from hearsay: College expenses have been steadily rising over the years.
For example, just annual tuition and fees (not counting room and board) for a four-year college degree at a public university cost $2,400 on average in 1975. That same four-year public university degree costs $9,400 per year in the 2015-16 school year (in 2015 dollars) which is still a bargain compared to the $32,400 in annual tuition and fees you\u2019d have paid at a private four-year college in 2015. But, public or private, you\u2019re looking at about a 3.5% annual increase in tuition and fees. And while that may not seem like a lot, it adds up quickly year-after-year, especially if you have a newborn and you\u2019re looking at where fees might be 16 to 18 years from now.
So how do you plan ahead so you have enough to cover your child\u2019s tuition and fees several years down the road??
Thankfully, it\u2019s not that hard to figure out. With some thoughtful planning, you can come up with a reasonable estimate of your \u201cmagic number\u201d for saving for college.
So here\u2019s what you need to consider as you start planning ahead:
1) The type of school you\u2019d like your child to attend: The cost of attendance varies greatly depending on whether you want a two or a four-year school and whether it\u2019s public or private. Costs ranged from around $11,000 to about $44,000 (including room and board) per year in 2015, according to a recent survey from the College Board.
Also, many of my clients have a sense of the kinds of students their children really are, even at a fairly young age. If they\u2019re honest, they can make an educated guess whether the child is Harvard bound or state college bound. So they can plan accordingly.
2) Room and board: Room and board, which accounts for a large portion of the cost of attendance, is one area where you can save money by having your child live at home for the first year or two if that\u2019s feasible. Though let me warn you, that\u2019s likely not going to go down well with your college-bound freshman who\u2019d rather be on-campus enjoying the \u201ccollege experience\u201d.
3) Inflation: According to the College Board\u2019s recent study, prices increased by about 3% from the 2014-15 school year to the 2015-16 school year.\xa0 It\u2019s best to err on the side of caution and choose a relatively high rate of inflation, say, 5%, as you calculate how much money you\u2019ll need to save.
4) Price actually paid: Thankfully, many students don\u2019t pay full price because of institutional and federal grants and tax benefits. So, depending on your financial circumstances and your child\u2019s educational prowess, your child\u2019s four-year degree could cost between 10% to 25% less, but I\u2019d rather you not fall short, so save the full amount and consider money saved to be a bonus after the fact.
5) Your child\u2019s contribution: Many parents believe that their children should help pay for school through work or student loans. If you decide to have your child contribute, make sure he or she is aware of the risk and burden involved in taking on debt.
Now let\u2019s put this all together with an example. Say you\u2019re a newly married couple and want to plan for college for your new baby, and you already have a type of in-state school in mind. Figure out the estimated in-state cost of attendance for 2016-17 at that university\u2014let\u2019s say it\u2019s about $26,500 in total per year. Now, figure out how much you\u2019d like your child to contribute; say you decide your child\u2019s share should be around $12,000 of that $26,500.
So your contribution works out to $26,500 less $12,000, which is $14,500 for the first year. Increase that by 5% each year and you\u2019re looking at $15,200 for the second year, $16,000 for the third year, and about $16,800 for the fourth year. Add it all up and you\u2019re looking at about $62,500 in today\u2019s dollars. Now factor in college expense\u2019s inflation of 5% over the next 18 years, so that\u2019s $150,