How much should you save in a college fund?

Mino Caulton and his parents of Shutesbury, Ma., were more than ecstatic when Juniata College gave the 18-year-old $18,500 in grants to pay for school. It was quite an achievement for Mino, who has dyslexia. Despite the good news, Mino had to rethink his options. Although 18-and-half-grand is a nice chunk of change for a small college to give a student, Mino and his parents would still be forced to borrow thousands more to pay for his education [source: Lieber].

It was a rude awakening for the Caultons, whose household income dropped 80 percent during the Great Recession. That left little money in Mino's college fund. Borrowing the additional cash was an option, but the family could ill afford any more debt. With his college prospects dimming, Mino was thinking hard about going to a cheaper community college [source: Lieber].

Saving for college has always been vexing, and the current economic squeeze hasn't made it any easier. According to the College Board, the average four-year, public-college tuition in 2011 was $16,140 a year for tuition, room and board and fees, up 6.1 percent. Those who want to go to a four-year, private college can expect to pay $36,993 annually [source: Market Watch].

Still, that's chump change considering that in 15 years the cost of a four-year public-college education could top more than $100,000, while a private school could skyrocket to $200,000 [source: Market Watch].

What are parents and students to do? Saving for college is hard, but it can be done. Experts say the sooner people start squirreling money away, the better. Even saving $100 a month for 18 years can yield a significant sum by the time college rolls around. Still, don't think for a moment that you have to save the entire cost. Grants, loans and scholarships can cover some of the expense. And please, experts say, don't sacrifice your retirement to pay for your child's education.

Like everything else, saving for college is easier said than done. Yet, people do it. Go to the next page and find out how.

Price of Education

Ever wonder why parents are so, well, pushy about how their children are doing in college? Ever wonder why the first and last words out of a parent's mouth before their child leaves for school are "study hard"? Parents are pushy because they love their children. They're also pushy because those children are an investment. Did you know that 37 percent of the average cost of paying for college comes out of mom and dad's savings accounts and paychecks, while an additional 10 percent comes from loans in their names? [source: Rampell].

Many parents begin socking away college money even before their little tykes are born. And it's not an easy row to hoe. In 2010, Fidelity Investments estimated the amount of money new parents would need to save each month for 18 years in a 529 college savings account (more on that next). Assuming that cost of college would rise 5.4 percent annually during that period, Fidelity concluded the following:

A household making $55,000 a year would need to save $48,000 over 18 years to send their kid to a four-year public university, and $107,000 to pay for a private college. That translates into saving $160 a month for public college, and $410 a month for a private university.
Households with an annual income of $75,000 would need to save $51,000 -- or $190 a month -- to send their children to a public university; and $115,000 -- or $410 a month -- to send them to a private school.
A family pulling in $100,000 a year needs to save $55,000, or $250 a month for 18 years to send their child to a public university and $123,000 -- or $460 monthly -- to send them to a private college [source: Schultz].

Fidelity based its calculations, not only on annual household income, but on an assumption that a family doesn't want to take out any loans. Fidelity then estimated how much in gifts, grants and scholarships a student would receive based on their household incomes. Fidelity subtracted that amount from the expected cost of college [source: Schultz].

However, the guidelines do not take into account costs such as health care and transportation, two expenses not covered by 529 plans. Parents can expect to pay upward of $2,500 more a year to cover such costs, the company said [source: Schultz].

Saving for College 101

Despite these eye-popping costs, experts say the best way to pay for college is to have a plan and stick with it. And thanks to the government, saving for college has never been easier. There are many ways to save, including the following:

529 plans -- These state-sponsored plans allow parents to put their hard-earned cash in an investment account with their child as beneficiary. As the owner of the account -- named for the IRS code section that created it -- the parent does not pay income taxes on earnings. If the kid doesn't go to college, parents can transfer the amount in the account to another family member. Moreover, parents do not have to pay federal income taxes when withdrawing money as long as the cash is earmarked for college expenses, such as tuition and books. There are no income limitations and any unused money can be withdrawn without paying a penalty -- just the tax [source: CBS News].
Coverdell Education Accounts -- Coverdell accounts are set up by the U.S. government. They are tax-deferred accounts where parents can contribute up to $2,000 a year, and the earnings grow tax-free. Distributions are not taxed as long as they are used for legitimate educational expenses. Parents can also use Coverdell accounts not just for college costs, but for elementary- and secondary-school tuition [source: Internal Revenue Service].
Roth IRA -- Using a Roth IRA to save for college gives you flexibility and offers a number of advantages. For example, if you withdraw your Roth IRA contributions early for college expenses, you won't be taxed or penalized. You can also leave your earnings in a Roth for retirement, while withdrawing the principal to pay for the cost of education. In addition, if little Billy or Bonnie decides they don't want to go to college, or find some other way of paying for their education, you can simply keep the money in your Roth IRA instead of moving it to a different savings account [source: Biller].

Kids, don't think that you're off the hook because your parents have access to these and other programs. The average student borrows 14 percent to cover the cost of college, while only using 9 percent of their savings and income [source: Rampell]. To help mom and dad, students can apply for loans, grants and scholarships. Oh, yeah, you can also get job or two.

Welcome to your first class: Introduction to the real world!

Lots More Information

Sources

Biller, Mark. "Using a Roth IRA to Save for College." CBN.com. (Oct 17, 2011) http://www.cbn.com/finance/Pryorcollegesavings.aspx
CBS News. "How to Save For College." Feb. 18, 2010. (Oct. 17, 2011) http://www.cbsnews.com/stories/2009/10/01/earlyshow/contributors/raymartin/main5356031.shtml
Internal Revenue Service. "Coverdell Education Savings Accounts." (Oct 17, 2011) http://www.irs.gov/newsroom/article/0,,id=107636,00.html
Lieber, Ron. "Balancing Debt Against College Choice." The New York Times. Mar. 23, 2011. (Oct. 17, 2011) http://www.nytimes.com/2011/03/24/your-money/24TEENS.html?_r=2&pagewanted=1&ref=payingforcollege
Market Watch. "College Savings Month Brings Savings 'Back to School.'" Sept. 23, 2011. (Oct. 17, 2011) http://www.marketwatch.com/story/college-savings-month-brings-savings-back-to-school-2011-09-23
Rampell, Catherine. "How Americans Pay for College." The New York Times. Aug 23, 2010. (Oct. 17, 2011) http://economix.blogs.nytimes.com/2010/08/23/how-americans-pay-for-college/
Schultz, Jennifer. "What You Should Save For College Each Month." The New York Times. Aug. 24, 2010. (Oct. 17, 2011) http://bucks.blogs.nytimes.com/2010/08/24/what-you-should-save-for-college-each-month/