Should I Start Saving for College Now …or Later?
Lisa Whitley — If you have kids, likely you have given consideration to the question “How will I pay for their college education?” It could be a fairly straightforward answer were it not for the fact that you may still be paying off loans from your own education. …And saving for retirement.
How do you find the balance?
It has been said many times, and yes I will repeat it here, that you must put on your own oxygen mask first. That is, you need to make sure that you are saving enough for retirement before prioritizing saving for your children’s future education costs. But does that mean that you should save nothing at all for future college costs for perhaps several years, as you shore up your retirement savings or pay off your old loans? Consider this:
- If you were to set aside just $100 a month for 17 years, at a 6% rate of return you would have amassed $33,855 by your child’s first year of college.
- But if you wait until the start of their high school years, even an aggressive $500 per month savings plan would likely yield you no more than $24,730.
Why the big difference?
Because when you are investing that close to the time when you need to use the money, you will need to invest in a much more conservative way. For this example, I used a 2% rate of return which, frankly, is pretty generous. And of course, you only have 4 years of compound growth, not 17!
To put these numbers in perspective, today the average annual all-in cost of one year at an in-state public university is about $20,000. Assuming inflation of 3% (because the cost of college is growing faster than almost anything else), that will be $33,057 in 17 years. Setting aside a modest amount now ($100/month), could pay for an entire year of college. Think of it as a 25% discount on a four-year degree!
* (Can I throw a bit more math at you? If your child were to borrow that $33,057, it may cost him or her more than $40,000, assuming a 4% interest rate on their student loan and the usual 10-year repayment plan.)
Absolutely you need to first prioritize paying off high interest debt, such as credit cards. Full stop. And if you are behind on retirement savings or have student debt to pay back, that too needs to be at the top of your to-do list. But as you work on those two higher goals, consider if you can still find even a modest amount in your budget for future college savings.