The average cost of raising a child born in the United States in 2015 is estimated to top $233,000.1 While that may include car seats, smartphones, and guitar lessons, it does not include the cost of college, which could easily double that figure if your baby ends up attending a 4-year private institution.
Like most Americans, you likely want your child to go to college—and hopefully one you can afford. But figuring out just how much to save—and whether you are on track—can be daunting. Tuition costs continue to grow generally 3% above the inflation rate,2 markets are volatile, and financial aid is difficult to estimate years in advance.
The good news: We’ve come up with a simple rule to check whether you are on track. Simply multiply your child’s current age by $2,000 for the amount you should have in college savings by that age. This figure can show you whether your college savings to date are generally on track to cover 50% of the cost of attending a 4-year public college.
Another way to check your progress is to use Fidelity’s college savings calculator, which allows you to change several key assumptions and then see how they affect the math. It’s important to note that our approach assumes a steady savings rate, adjusted for inflation, over time. The results will show you approximately how much you should have saved to date, assuming this steady savings rate continues into the future. If you are behind in your savings efforts, the calculator gives you the ability to adjust your monthly savings amount and see what the impact would be in closing the savings gap.
College savings math
Estimating the future cost of college—and how much you should plan to save for your child’s education—is dependent on the key factors outlined below.
How much will your child’s college cost?
The cost differences between public and private schools can be significant. The College Board estimates the current yearly cost of a public 4-year college at $22,1803 versus $50,770 for a 4-year private college.4
Our 2K rule (which multiplies your child's age by $2,000) assumes the student is attending a public 4-year college using the College Board estimate: $22,180 per year for 4 years, though the college savings calculator allows you to create a customized estimate if your costs are different.
How much of the bill do parents plan to pay?
Findings from Fidelity Investments' 2020 College Savings Indicator Study5 also reveal that although many parents plan to pay the total cost of college and are increasingly on track, they need to start saving earlier: Fewer parents are starting to save before their child reaches the age of 2—33%, down from 37% in 2018—but are on track to meet 33% of their college funding goals. The good news: This important college savings indicator is up from 28% in 2018.
“We’ve seen the percentage of costs parents intend to cover grow over the past several years, even as college costs continue to climb. Parents want to help minimize the burden of potential student loans,” explains Rita Assaf, vice president, Retirement and College Leadership at Fidelity Investments. “Despite these good intentions, fewer families today can realistically reach these lofty savings goals.”
Any way you look at it, parents are on the hook to pay the lion’s share of college expenses. To keep things simple, our 2K rule methodology assumes that parents, on average, are expecting to cover 50% of college costs from savings. That’s the starting point for our college savings calculator. Your own situation might vary, so we’ve added the flexibility to let you input the percentage of college expenses that you expect to pay from savings.
When will your child attend college and for how long?
Despite the growing interest in “gap-year” programs, our model assumes that students will attend college beginning at age 18 and graduate in a 4-year period. We assume that college costs continue to grow at 3% above inflation from now through the projected graduation date.
Our rule suggests a savings target of approximately $2,000 multiplied by your child’s current age, assuming attendance at a 4-year public college (at $22,180/year), and your family aims to cover approximately 50% of college costs from savings. Remember, this rule of is only a starting point to help you estimate your college savings goal and may change over time and based on your particular situation.
Every family has different savings goals
“Our 2K rule is an easy way to see whether you are on track, especially if your children are still young and you are not sure where they will ultimately choose to go to college,” says Andrey Lyalko, a vice president at Fidelity. “Because this approach may not apply to all situations, make sure to develop a robust college savings plan and be mindful that college costs are a variable that can dramatically change over time.”
So what if your situation differs from the norm? Perhaps you are hoping for a sports scholarship for your aspiring student athlete. Or maybe you are looking to cover 100% of college costs and are not expecting any scholarships or grants. You may also believe that your child will go to a private college, where the costs could be substantially more than the average public university.
The college savings math can still work for you:
2 hypothetical examples
Meet the Browns: The public university that their 14-year-old son would like to attend costs $20,000 a year (today). Because both parents worked their way through college, the Browns believe their son will value his education more if he funds most of it himself. They’d like to help him by paying 25% of the total cost per year or $5,000 ($20,000 x .25) in today’s dollars and they intend to cover this 25% using savings.
Following the general 2K rule, for every $10,000 of cost per year they plan to cover from savings, the Browns would multiply their son’s age by $2,000 to determine what their goal would be to have saved to date. However, because $5,000 is half of $10,000, they need to have saved only half of the 2K rule multiplied by their son's age to stay on track. So, their college savings target is approximately $14,000 (2K x his current age of 14 x 0.5).
Now consider the Millers: In this hypothetical example, the school their 14-year-old daughter has chosen costs $50,000 a year (today), and they’d like to pay 50% of the cost, from savings, or $25,000 a year.
For each $10,000 per year in cost, the Millers will need 2K times their child’s age. The Millers’ college savings estimate is more than double the standard 2K rule because they chose a more expensive college. Thus, the amount they should have saved so far to stay on track would be $70,000 (14 x 2K x 2.5).
College saving: Part of your overall financial planning
Once you have a sense of your college savings needs, make sure you are investing the money appropriately. Among several available college savings options, a great place to start is to open and contribute to a 529 college savings plan account. It’s popular with parents and grandparents alike because there are few restrictions and the benefits are plentiful. You can potentially reduce your taxes, and retain control over how and when you spend down the money.
“As you watch your kids grow up and get ready to leave the nest, remember that staying invested appropriately is key,” says Assaf. “529 plans often include age-based investment options that potentially help you stay on track. These investment options automatically shift your investment mix from more aggressive (more stocks) to more conservative (fewer stocks) as your child approaches college age. That can help mitigate the effects of a market downturn by moving the portfolio to a more conservative asset allocation soon before those tuition bills start to hit your inbox.”
To make sure you are on track with your savings goals, and to ensure you have an appropriate investment mix, revisit your plan at least annually. Over time, you will likely need to update the costs of schools you are considering in light of your financial aid situation, your child’s school preferences, school location, and your investment performance. Since the college calculator estimate gives you only a starting point or rough savings target, it’s always good to have a more robust college savings and planning discussion with your financial advisor.
Tip: Public and private college costs can vary greatly by location. For public colleges and universities, your state of residence is one of the most influential cost factors. If you find that your savings are not on track, widen your search and consider applying to less expensive colleges or those known for providing generous aid or merit scholarships.
Next steps to consider
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