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Most parents are shocked to find out the costs of a four-year college education today, let alone what they may be in the future. At first glance, the numbers may seem unbelievable, perhaps even unreachable. To overcome that impression, remember that your investments may grow over time just as college costs will rise. With your investment dollars, you try to keep pace with—and perhaps outrun—inflation in college costs.
In recent years, college costs have increased rapidly. For example, the average annual tuition for the 2004-05 academic year at a private college is $20,082, and it is $5,132 at a public college. If you include room and board expenses, the average annual cost of one year's college education is $27,516 for private colleges and $11,354 for public colleges.1 When you multiply these costs by four years, factor in inflation, and perhaps even increase the numbers for additional children, you quickly realize the tremendous expense that lies ahead. This emphasizes the importance of careful planning to be able to meet your education savings goals.
To estimate what the future cost of an education may be for your child or grandchild, consult the Education Planner.
How Much of the Total Cost Will You Need to Pay?
In setting your college planning goal, you'll need to consider how many children you have, their current ages, the kinds of colleges they're likely to attend, the amount of financial aid you anticipate, and the portion of college costs you plan to provide for your child.
While the amounts may seem high, they're designed to provide a realistic starting point. At some colleges, costs may be higher. Likewise, the amount you may need to set aside could be lower depending on the particular school, your child's ability to qualify for financial aid, and contributions made by your child working to pay for part of his or her college education.
Financial Aid
There are various kinds of financial aid including:
- grants and scholarships
- work/study loan programs
- student loans
Today, many factors may influence eligibility for financial aid, from the student's academic or other achievements to family size and the parents' age and income. Since many colleges and universities allocate financial aid based on need, families with lower incomes should not automatically assume they can't afford to send their children to college. Middle-income families may also be eligible for financial aid, even if they own a home or have investments.
One more thing to remember: don't rule out high-quality schools based on cost alone. While these colleges may be more expensive, they may also have more resources available to assist families with a genuine financial need. Generally speaking, higher-income families should anticipate less financial aid. While individual situations may vary, middle-income families should expect to pay at least 60-80% of the total cost of college—possibly even more.
The kind of aid may also make a difference. In recent years, most financial aid has been in the form of education loans.2 Since loans must be paid off with interest, the cost of accepting certain types of financial aid may be considerably higher than the amount received. Whether you or your children will repay the loans, it's wise to consider these additional costs.
Determine How Much You Need to Invest
Once your goal is in focus, there are two basic resources that can work together to help you meet your goal:
- Savings or investments you've already set aside for education
- Money you plan to set aside in the future
The key amount is how much you should plan to invest monthly, quarterly, semiannually, or annually to reach your goal. If you'd like assistance calculating that amount, your investment professional can help, or you can experiment with various savings amounts and time frames on the Education Planner savings calculator.
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