NEW YORK (MainStreet) — The average cost of college is over $30,000 for a public, in-state school -- and it's only going up from there. With the cost of college high and rising, you've probably thought about putting aside money for your children's higher education. But how much is enough? Is there such a thing as too much? And how do you go about budgeting for it?
Consider the Family Culture
Mark Blackwell, an area wealth executive at Regions Wealth Management, says that before you do anything, you should consider the education culture of your family. "A lot of times, the last three generations have been to the same state school," he says. "It's likely that the next generation will go to that same school." While your children aren't necessarily going to attend your alma mater, getting a general idea of the family's education culture can help you to begin budgeting.
"Think about what your aspirations are," says Keith Bernhardt, vice president of retirement and college products at Fidelity Investments. "Are you thinking about a two year or a four year?" What's more, Bernhardt notes that most parents do not expect to pay the full cost for their children's college education. He says most people are thinking about more in the 60% neighborhood, with grants, loans and other sources paying for the remaining 40%.
"You're trying to save money for a future major cost," says Mark Kantrowitz, senior vice president and publisher of Edvisors.com. "Saving for the full cost can cause some real sticker shock." He compares the cost of college to the cost of a house. No one worries about coming up with the full cost of a house. Instead, they save for a down payment and get a mortgage. Kantrowitz likewise breaks a college education into three parts: past income (savings), current income (salary) and future income (loans). Each should be about a third of the total cost of college.
Not Much Beats a 529 Plan
When it comes to actually saving, there's no real substitute for a 529 plan. These are plans set up by state governments to help pay for the cost of college. The only way you're really going to get a better deal when it comes to education savings is if you prepay for a college education and that's only an option at a small and shrinking number of state schools. There's just one problemwith a 529: the money can only be spent on education. So if your child doesn't go to school, gets a lot of scholarships or goes to a two year when you were planning for a four year, what should you do?
"Let it ride," says Bernhardt. Your kids might go to school eventually. He also notes that just because that child doesn't use the money for education doesn't mean another one will -- nor even that one of your children has to. You can transfer the beneficiary on a 529 account to just about anyone you're related to. You can even spend it on yourself.
Save Early, Save Consistently
"The earlier you start, the longer-term your portfolio is, the greater ability you have to invest in growth investments that provide better long-term returns," says Blackwell. This is due to two main factors: first, the longer you have the money in your savings, the more the miracle of compound interest can take effect, and second, the longer you're planning to wait before you withdraw the money, the riskier your investments can be. Sure you might take a big hit in year 8 and not recover until year 11 -- but it won't matter as long as you have what you need in year 18. On the other hand, if you only have eight years to save, you absolutely can't take a hit in year 8.
Finally, Blackwell brings up an important point about saving for a college education: don't feel like the entire responsibility falls on your shoulders. "Attending community college is a great option that didn't really exist 30 years ago," he says. "There's Army scholarships that are fully paid for. The full responsibility doesn't rest on the parent. There are options for the students."