<p>I wonder what the answer to this question would have been if it were asked 18 years ago in 1992. check out the last graph in this wikipedia entry.</p>
<p>I don’t think anyone saw the inflation of COA coming relative to general inflation. I don’t think we really know what lies another 18 years ahead. Nevertheless, it is wise to take some steps toward securing your and your child’s future. The actual dollars you save will be just a guess. As a parent with only two of my children’s 12 years of college paid for, I have not found college savings to be unfairly penalize by those schools awarding financial aid we have received. In fact, I can’t imagine paying for college without the 529 funds we have managed to save.</p>
<p>1992 was about midway through the secular bull market from 1982 to 2000. Stock market returns were spectacular as were some aspects of inflation. We generally have deflation at the moment but college costs continue to rise as there are enough people that manage to pay the expensive tab.</p>
<p>I received 2 pieces of advice when my child was young… To be honest, neither of them would have turned out to be accurate.</p>
<p>1) I was told to pay for my states pre-paid college fund. If I would have, I would be getting the money returned to me with NO INTEREST as none of the colleges he considered would have accepted the plan. So, 15+ years of savings returned at 0% interest, I would have been better to put the money into bonds or something and at least get some return.</p>
<p>2) I was told to blow all of my money, don’t save anything, and that my child would get 100% financial aid. This is somewhat of a myth also. The only way this would have been true would have been to also keep my salary very low because even if you have $0 in assets your EC is also based on your salary. And who in the world would be willing to make NO MONEY just to get free tuition?</p>
<p>In the end, I think it is reasonable to say that you should be saving 5-10% of your annual income to help offset college costs. Obviously this may be too little or too much depending on your income and the college chosen.</p>
<p>1st priority - retirement savings. You can’t take out loans to finance your old age. If you are putting away 15% of your gross (before taxes) from the time you graduate college until your children are college age (mid to late 40’s), you should have enough socked away that you can suspend retirement savings during those college years and have that 15% to pay towards your EFC (with the rest borrowed). That money long ago put in the IRA’s and 401k’s will be invisible to FAFSA and Profile (unlike a 529) and will continue to grow during those college years.</p>
<p>2nd priority - a modest home in the best public school area you can afford. When I say you can afford, that doesn’t mean with adjustable rate mortgages and whatnot. I mean by the old school rules 1/4 of your gross for Principal, Interest, and Taxes. Remember, you are supposed to be saving money for your retirement while doing this. You are trying to get the best opportunity for them to achieve here without risking the whole enterprise.</p>
<p>3rd priority - Other experiences that make the family life better. This includes the educational type vacations (Williamsburg, DC, etc.). It also includes ECs that your child is entirely devoted to and excels at. Clearly you may have to try a few first to see what really works, but there is more to a child’s development than is found in the classroom.</p>
<p>Notice I did not say educational savings here? Most state sponsored plans lack either flexibility or the necessary return if you require flexibility. And as mentioned, the 529’s do count as an asset (even as a parent asset) in calculating FA. If you grow your other necessary assets carefully (retirement and housing) and manage your cash flow conservatively, you’ll be able to manage the college years without an earmarked jar for college savings.</p>
<p>Now is the time to take the big risk/reward. As your child (ren) age, you will have less money, time, and opportunity to take the risk. You only have ~18-21years of investment (actually about 15-18years because you’d like to take less risk as child(ren) get close or incollege.).</p>
<p>You may have 30 years until you retire but half of that for college expense accumulation. When the time comes, stick to UGMA because you have more options and use 529 sparingly. </p>
<p>If you absolutely know you are staying put, look into prepaid tuition plans, which guarantee tuition at your state university. They are usually very good buys if you purchase them when the kid is still a baby, and get more expensive as kiddo approaches college age. OTOH if you move out of state or the kid turns out to want to study far from home, they are not a good deal.</p>
<p>529 plans offer more flexibility. I chose one that automatically becomes less risky as the kid approaches high school graduation, and that gives us a state tax deduction. We saved a couple hundred dollars per month per kid from the time they popped out, and now have enough comfortably to pay tuition at our state flagship (UVA). I’d actually hoped to save enough to cover private-school tuition, and used an online calculator to give me an appropriate savings figure, but college costs have risen so dramatically in the past 18 years that the amount is now sadly inadequate for that purpose. That said, there are a number of calculators online to help you get started: just google and any number of them will pop up.</p>
<p>I just did a sample calculation on the FAFSA website for what the EFC of the kid would be today, using my savings and income from today. It came up with $50,000! I believe that will rule out any chance at need based financial aid unless something bad happens in the next 19 years.</p>
<p>Alright, it’s time to start figuring out the savings options.</p>
<p>Yeah, the state I’m in has a great guaranteed tuition program. You buy today, it will pay for cost of college in the future at the most expensive in state school, or equivalent value at any other US-based school.</p>
<p>I bought some shares last year in anticpation of future kid, and will continue to buy additional shares.</p>
<p>It would also be helpful if you could ensure that your baby becomes a genius and gets high grades and test scores. Make sure he/she eats his veggies! Ha, ha.</p>
<p>When Happykid was in elementary school I went to one of those “save for college” nights where I was told college would cost $XXXXXX when she got there, and that a 529 was the place to put my money. The figure was so HUGE that I couldn’t imagine ever reaching it. With only one child, a 529 made no sense to me. What would I do with it if she didn’t go to college? Was I supposed to just hand that money over to one of her cousins?</p>
<p>What I wish someone had told me was, “Put something away each month. Cut out one restaurant meal, or a couple of movies, and save that money. An every-day savings account is OK.” Right now, a small college fund of $10k would mean the difference between in state tuition/fees for two years at a public U and two years at our local community college. $5k might cover Happykid’s books for all four years. Even a small amount helps. </p>
<p>Don’t let the big numbers scare you. Choose an investment vehicle that makes sense to you, and offers the flexibility your family needs.</p>
<p>We did well with reinvesting dividends. Over 18 years they really added to our d’s stock portfolio. The dividends purchase additional shares which generate added dividends and in the end we did well by her. We also put money in mutual funds for her. After about 12years we didn’t add very much, but for the first 12 years we put in about 5,000 per year.
It wasn’t easy, we did take family vacations but they were not abroad and they were not fancy. After that twelve years of saving for college we just continued to lead the same lifestyle only the money was for retirement. We had already been saving through 401ks and IRA’s but we wanted to pay off our mortgage before we retired. Which we did.
The savings pattern never changed.</p>
<p>Let me also add that I was 35 years old when our d was born. We had established careers. You may be a lot younger and starting out. So I wouldn’t suggest that you can save what we did, what I do suggest is that you save regularly and save more as you make more money.</p>