Very often parents face the question how much to save. They are often shocked by the cost of a college education. Four years of college for their children will cost four to seven times as much as their own education cost their parents. You don't need to save the full amount. You can 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. In fact, one third will be coming from past income (savings), one third from current income, and one third from future income (loans). This combination let you spread the cost of a college education over an extended period of time.
(If you want to save the full $300,000, you'd have to save $107.64 a week or $466.04 per month from birth in order to reach their goal at 5% interest. Most families cannot afford to save such amount. That's about as expensive as an additional car payment or child care expenses.) Given that long-term tuition inflation is 8%, children born today will pay at least three times current college costs by the time they will be admitted to the college. If you combine this with the one-third rule, you will get the answer on how much to save. Parents of a newborn should use current college prices as a goal for their college savings. In other words, set the savings goal based on college costs in the year the child was born.
There are other good rules for deciding how much to save:
1) Try to save at least 10% of your current income (per child), beginning the day the child is born. (If you wait until the child enters first grade, you will need to save 18% of your income per child.)
2) Begin the day your child is born try to save 10% to 15% of each year's college costs (per child).
3) Each year try to save at least $2,500 per child starting from the birth. It will cost you about $50 a week or about $210 a month.
4) If possible, maximize your tax deduction. You can do it if your state proposes a tax deduction for contributions to section 529 plans.
5) Base your savings goal on paying full cost at a public college in your state. This should be a little cheaper than half the cost of the most expensive private college, proposing you a more reasonable goal. This will help you to have your child at a more expensive college.
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