Here's how much money you need to invest today to send your kid to college for 4 years
- The price of attending college in the US is more expensive than ever, but parents and students still shoulder the greatest share of tuition costs.
- We calculated the lump sum a parent or grandparent would need to invest today to cover four years of a private or in-state public education in cash.
- The calculations assume that no contributions are made beyond the initial investment and that it earns a 6% return annually. We also factored in estimated inflation costs.
- If you're looking for help planning for college, SmartAsset's free tool can help find a licensed professional near you »
College is more expensive than its ever been, and the costs are only rising.
But most families believe the high price is justified. According to the Sallie Mae report "How America Pays For College 2019," a survey conducted in partnership with research-company Ipsos found that seven in 10 parents and students say the cost of college today is either appropriately priced, a bargain, or worth every penny.
Despite collective student-loan debt in the US topping $1.6 trillion, the report found that parents and students still shoulder the largest portion of tuition costs. Family savings, investments, and income - in other words, non-borrowed or gifted funds - cover 43% of the average student's college expenses as of the 2018-19 academic year.
According to College Board data, the average all-in cost - tuition, fees, and room and board - to attend a private, four-year college in the 2018-19 academic year was $35,830. Over the past decade, the cost has risen by an average of about 2% annually.
Meanwhile, the average all-in cost to attend a public, four-year college as an in-state student in the 2018-19 academic year was $10,230. The annual rate of inflation for public college tuition over the past 10 years was roughly 3%.
Using these figures, we calculated the lump sum someone would need to invest today to cover four years of a private or in-state public education in cash in the future. In the finance world, this is referred to as "time value of money," a calculation that illustrates that a current pot of money is worth more than the same pot of money in the future thanks to its earning potential.
In the table above, the estimated annual all-in cost is how much a private or public education will cost at the time the student begins college, assuming a 3% rate of inflation for public college and a 2% rate of inflation for private college, based on College Board estimations. We used five-year, 10-year, and 15-year intervals.
The calculations assume the lump sum is put into an investment account - either at a brokerage or through a 529 plan - today and earns a conservative 6% return rate annually until the child's first semester of college. Historically, the US stock market has returned an average of 7% to 8% each year, adjusted for inflation.
Our calculations show that a parent whose child will begin college in 10 years would need to invest a lump sum of about $29,400 today in order to have enough cash to pay for four years of a public education. A private education requires an investment of about $92,170 today. These calculations assume no money is invested beyond the initial lump sum.
Financial planners recommend investing through a 529 plan
To be sure, the typical American parent isn't covering the entire cost of a college education for their child or children. Most families finance school with a mixture of savings, income, and financial aid. Nonetheless, these calculations show what is possible with compound growth.
Many financial planners recommend opening a 529 plan to put away as much as possible for college. As evidenced by the calculations above, the earlier you begin, the less money you need to invest.
529s are state-sponsored, tax-advantaged investment accounts in which the money grows completely tax-free and can be withdrawn tax-free at any point, so long as it's used to cover college tuition, housing, fees, books, and supplies. 529s can also be transferred among children if one needs more or less money for college than initially expected.
Annual contribution limits for most 529 plans are high, starting at $235,000 in some states. However, any contribution made in a single year above $15,000, or $30,000 for married couples, will incur a gift tax. A parent or grandparent may also frontload the account with up to $75,000, or $150,000 for married couples without incurring a gift tax, though they won't be able to contribute for another five years.
If you're looking for help planning for college, SmartAsset's free tool can help find a licensed professional near you »
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