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How Can You Avoid Going Broke When Saving For College?

© Arman Rousta

When it comes to saving for your children's college education, the numbers can be downright scary. The average cost of college has increased steadily over the past 30 years at over twice the rate of inflation. We won't get into the detailed numbers here, but just know this - to send a ten year-old child to a private four-year college when he reaches college age will cost more than $250,000. Well, it's a good thing that 80% of our nation's kids attend public colleges. But wait, before you get too excited, know this - the average total cost of public colleges has jumped to $10,636 per year, nearly a 10% increase in just one year!

Despite this rampant cost increase, pound for pound, the economics of public school education may outweigh that of private colleges for families that just cannot afford the bill. Families should seriously weigh whether they want to put a young student's future in an $80,000 hole for the sake of sending them to a more "prestigious" institution. There is no right or wrong answer here, so this dilemma is best handled on a case-by-case basis.

I believe that each family must size up what it can realistically save for college, keeping in mind the escalating college costs, and aim for that saving goal whether or not it will cover the entire cost. For example, a family with a five year-old child that has not started saving for college would evaluate their discretionary monthly income and determine how much they could comfortably set aside into various education savings vehicles. "Discretionary Income" means the income that is left over, on average, after paying out taxes and basic monthly expenses such as rent, food, and travel. So let us say that this family's discretionary income is $3,000 per month. From this amount, they feel comfortable setting aside $500 per month for their child's education. So that equals $6,000 per year, which if compounded at 5% over the next 13 years, amounts to roughly $111,600. Regardless of whether the family aims for Harvard at $275,000 or the University of Albany at $100,000, at least they have something substantial available. The student would ultimately have the choice to take on loans and grants to attend the private college, or go to the public college with $10,000 cash in his pocket and no debts to worry about. Whether or not the Harvard degree is worth the extra financial burden is a decision that the student and parents must collectively make.