Saving for College: How Much?

How much do you need to save to fund your child’s (or children’s) college education?  This post provides some guidance in answering that question. A subsequent post will focus on how to invest college savings funds. This is the second post in a series related to saving for your children’s education (see also Saving for Minors).

There are two quantities upon which one should focus: (1) the maximum amount it could cost to finance your children’s college education and (2) the amount you’ll be required to contribute from your own resources. The former is the most you’ll need. There is no reason to save more. The latter is known as your expected family contribution (EFC) and it is the minimum you’ll need; the rest made up by loans and grants.

Fortunately there are some good calculators on the web to help estimate these figures. Let’s start with the maximum amount. I like the Worlds Simplest College Cost Calculator at It requires the following inputs: your child’s age, current cost of college, assumptions about the rate of increase in college costs, and the rate of return on investments.

For college costs use current average figures (2008/2009 figures are: public = $18,326/year, private = $37,390/year) or school-specific estimates from the National Center for Education Statistics. For college cost inflation, 6% has been the recent rate. You can also use the public or private institution rates or get recent price trends from specific schools from the National Center for Education Statistics. Rate of return on investments depends on how you invest the funds. This is the nominal rate so it includes general inflation. Something in the 7%-9% range is perhaps reasonable.

Being reasonably conservative, I made a calculation using the current annual cost for a private institution (with 6% inflation) and a 7% annual rate of return on investments. Doing so, I learned that it will cost about $370,000 to send each of my children to college. To meet that goal, I’d have to save $2,000 per month, every month.

I don’t have $2,000 per month to save for college unless I forego retirement savings (that’s a big no-no, don’t do it!). But I don’t have to fully fund college on my own. Let’s figure out the minimum I’ll have to contribute, the EFC.

I like the EFC Calculator because it computes EFC using both the private institution method (FAFSA) and the public institution (a.k.a. federal) method (CSS PROFILE). To use the calculator you’ll need to know your adjusted gross income and a few other income details (consult your tax return), whether or not you qualify for the Hope tax credit or federal means-tested benefits, and the value of non-retirement assets and home equity. The calculator allows you to enter the number of children, and the result is your EFC for the entire family. You can also run it separately for each child if you wish, assuming the other is not in college. This makes sense if your children are not in school at the same time.

To be conservative, I used the calculator assuming I would not be eligible for any tax credits or other benefits. I recommend entering income and asset figures as of today and pretending your kids are going to college today (or soon). That gives you an EFC for today. Unless your income and assets change your EFC should stay relatively constant. I make the assumption that my income and assets that are countable toward my EFC stay constant in real terms. To the extent this isn’t the case, I will correct for it as I revisit this calculation every year or two.

After doing the calculation a number of ways I determined that I will be required to contribute about $20,000/year in current dollars for a public institution. Multiplying by six (my two children will be in school for a total of six years) means I’ll need to amass about $120,000 in today’s dollars to send both children to school in many years. Given what I’ve already saved, I can reach this goal by saving about $200/month assuming a real annual compound growth rate of about 4% (I used the savings calculator).

OK, $200/month. That’s doable, and far less than the $2,000/month I’d need to save to fully fund both kids at a private institution. By selecting the lower public institution EFC results and the higher private institution fully-fund figure I’ve bounded the college savings problem. I need to save at least $200/month and no more than $2,000/month. For any amount in between my kids can afford to go to some college, though not necessarily a private one.

I will revisit these calculations every few years to make sure I’m on track to meet the goal. Hopefully college cost inflation will tame a bit over the next decade. That would really make this problem much easier.

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