From the New York Times Motherlode Blog based on advice from Jean Chatsky:
So, here’s my suggestion: Don’t aim to pay the entire bill. If you can come up with one-third of the money your kids need for college before they go, you are doing a good job. Think about paying another third out of your then-cash flow. And have them borrow the final third.
How do you do that in your current situation?
First, make sure that you are saving and investing for your own retirement. I assume you’re contributing to your workplace retirement plans — but that is a must!
Then work off two things, salary increases and windfalls. Open a 529 College Savings account (go to savingforcollege.com to find the best one for you).
Then, the next time you or your spouse gets a raise, figure out how much your take-home will increase and schedule automatic transfers to that 529 in that amount the day you get paid. Move windfalls to your 529 as well. If you get a tax refund, deposit that money. (Then change your withholding to boost your take-home pay and increase your automatic contributions so that you’re no longer giving Uncle Sam an interest-free loan.) Birthday and holiday checks can go into the account as well.
As soon as you see you’re making progress, you’ll start feeling — as a parent — like you’re doing a better job.
So, save 1/3 before they go, pay 1/3 out of cash flow when they are in school and have them borrow one third. I thought I would see how this would translate into a plan for my six month old son to attend a UC or CSU in California.
Lots of assumptions here so please bear with me:
So, first the cost side. Average cost of attendance (COA) today for a UC school is around $28,000 with a CSU campus having COA of about $20,000. Assume 5% annual increases (which may be optimistic given the budget situation here) and the total price tag for four years of education (gulp): $276,609 for UC and $197,578 for CSU.
So, how to accumulate 1/3 savings for UC and CSU? Saving roughly $300/month for the next 18 years would cover 1/3 of UC and about $200/month would do the same for a CSU education (assuming 6% investment return)
Paying 1/3 out of cash flow would require about $23,000/year for UC and $16,000 for CSU in the 2017-2020 period. Of course, if salaries increase 3%/year, then a $60,000 salary today would equate to almost $100,000 in that timeframe, so 15%-23% of income would go to cover college expenses (hello, Ramen noodles).
The final 1/3 would come from student borrowing. Federal loan limits for dependent students would need to increase by about 7%/year from current levels of $31,000 to get to that borrowing limit of $92,000 required for the UC program or 5%/year to get the borrowing limits needed to cover 1/3 the cost of a CSU degree. And if loan limits don't keep up....hello, private loans.
What did I learn going through this exercise?
- It is no wonder that parents don't like to do financial planning...the results can seem overwhelming.
- The one significant variable left out of this calculation was any financial aid or scholarships which would lessen the burden in each of the three categories.
- Something has got to give when it comes to college tuition levels, as they can't continue to grow at rates they have over the last 20 years.
- How about student summer jobs which can not only help students save for college but also provide them with valuable life skills?
One final anecdote about my failings as a parent in teaching about the importance of saving. My daughter was excited to show me her "100 days of school homework assignment" (today is her 100th day of school this academic year). She was asked to write three sentences about what she would do if she received a $100 gift. Her answer went something like this:
Pretty good so far huh! And then the clincher:
I still have a bit of work to do...at least she hasn't asked for a credit card yet.