College Costs

When parents first start trying to decide how much to save, they often get overwhelmed by the cost of a college education. According to the Bureau of Labor Statistics, tuition increased by 8% per year, on average, from 1979 to 2001. This means that children born today will face college costs that are 3 to 4 times current prices. For example, this means expenses to attend a four year college could total $300,000 by the time your child is of college age (keep in mind this estimate is based on your child attending the highest priced college or university).

The One-Third Rule

As far as how much to save, don’t worry about saving the full amount! Use the one-third rule as a rule of thumb. The rule states that you should expect to:

• save one-third of the expected college costs,
• pay one-third from current income and financial aid during the college years, and
• borrow one-third using a combination of parent and student loans.

Essentially, one-third will be coming from past income (savings), one-third from current income, and one-third from future income (loans). This lets you spread the cost of a college education over an extended period of time.

Other good rules of thumb for deciding how much to save include:

• Saving at least 10% of your paycheck (per child), starting the day the child is born.
• Saving 10% to 15% of each year's college costs (per child), starting the day your child is born.
• Saving at least $2,500 per child per year from birth (about $50 per week).

The more you can save, the better off you'll be. Saving just $25 a week from birth to age 17 at 5% interest will yield almost $35,000 – a nice college fund!