With college costs continuing to climb, is it realistic to think parents can fund their children’s college and their own retirement? The financial aid website (www.finaid.org) suggests using the 1/3 rule of thumb, meaning if you can afford it, you should expect to pay 1/3 of the cost of your child’s school expenses from savings, and the rest could come from current income, loans, grants, work-study, etc.
Let’s look at some numbers: educational costs at the college level have been increasing by 7% or 8% a year. Our sample child (SC) is currently 4 years old, and the current in-state tuition for the state university her parents want her to attend is $7000 per year. In 14 years when SC is 18, four years of tuition at this university is expected to be $80,000. The 1/3 rule says the parent(s) of SC should try to have $26,500 saved by the time SC enters college.
Here are some things you might consider when determining how much you can afford to save for/pay for your child’s college:
1. There are NO loans and scholarships for retirement.
2. Would your child prefer to repay loans from their college expenses…..OR would they prefer to help support you during your retirement because you sacrificed saving for retirement to pay for their college? (One more thought on this one – will your child someday have a spouse/significant other that will have an opinion too?)
3. By getting a college degree, your child boosts their earning power by an average of $1.2 million over their working life.
4. What contributions can your child make by working and saving their own money towards school, as well as working during college? Will this “buy in” make them more invested in learning and doing well? What, if any, portion of student loans do they need to take on?
5. Does choosing a more expensive school really pay off during and after college? If your child has to pay all or part of the cost, will they choose differently? See the article at http://shine.yahoo.com/back-to-school/10-reasons-to-skip-the-expensive-colleges-2518407.html
Make sure everyone involved in the funding of college understands the opportunity costs involved. This includes how much it will cost to pay back any loans, over the long-term, when determining how much it is worth to attend a particular school. Look into 529 savings programs, prepaid tuition programs, grants, scholarships, work-study and community colleges, etc. to help keep up with expenses or tuition increases. Community college can be a good option for the first two years, especially if your child wants to graduate from a high priced alma mater.
Here is an article that gives additional thought to the financials of paying for college: http://www.forbes.com/sites/timmaurer/2012/05/31/the-non-conformists-4-step-education-savings-plan/