College is expensive.

Either you, as a parent, need a plan to pay for it or your kid(s) might be shackled with student debt later in life.

Do your child a favor and start planning now to help them.

Here are the steps needed to develop a plan to pay for your child’s college costs.

Plan For Your Child’s College Education

A quick note on financial planning. Good financial planning requires a lot of “best guesses” and adaptability. You have information but nothing in the future is guaranteed. Not investment returns, your health, your income situation, or any dozen other factors. You plan with what you have, knowing that if you get off-track over time, you’ll need to adjust. And that’s okay. That’s part of good financial planning.

Student Loan Debt

The average college graduate in 2021 left school with more than $37,000 worth of student loan debt. The average loan payment these students were making was $351 per month.

Those are averages. Some students graduated with less – or no debt at all. So the students who did graduate with debt likely had balances and payments well above those average amounts.

The good news is that you, as a parent, can take steps now to lower or even prevent your child from dealing with this burden. Just imagine how much better off they’ll be if you put in place a plan to help pay for your child’s college education.

Let’s look at the steps in planning to pay for your child’s college education.

What Will College Cost For Your Child?

Over the past ten years, the cost of college tuition has been increasing at more than twice the standard rate of inflation. Thankfully these increases have slowed way down in the past few years. In fact, recent rate increases for state public colleges have only been 2.9% annually.

Still, that ~3% can really add up over time.

Determine The Base Cost Today

While we never know for sure what college our children will pick, we need to start somewhere in our planning. I recommend an in-state public school because that is likely to be the most cost-effective option.

The University of South Carolina costs $29,121 – everything included – for 2022-2023.

They mention that the average grant amount per student is $7,337 per year. If your child is to get the average grant level, that still puts the annual cost at $21,784 per year.

Whether you decide to use the higher, non-grant, number or a more aggressive lower one is up to you. For this case study, I’ll use the higher number. It’s better to be pleasantly surprised than to undershoot a goal.

Calculate The Cost In The Future

The easy way to figure out the future cost of something based on an inflation rate is to use an online calculator. There are a few of them but here’s one I’ve used a couple of times.

Use the “Forward Flat Rate Inflation Calculator” option (the 2nd down). Enter your starting dollar amount – $29,121 for my example. Then enter an inflation rate – I’m going to use 3% for my estimates. Lastly, enter the number of years into the future that you want to calculate. I’m going to assume a newborn for this example, so 18 years until college tuition will be needed.

What answer did I get? $29,121 at a 3% inflation rate after 18 years equals $49,576.

That’s the total cost for the first year of college based on those assumptions. Next, add 1 to the years to estimate the second year costs, then the same for the third and fourth year.

Now total those four years of estimated costs to figure out how much a four-year degree might cost for your child.

My Example’s Numbers

  • 1st Year: $49,576
  • 2nd Year: $51,063
  • 3rd Year: $52,595
  • 4th Year: $54,173

That works out to a total four-year college cost estimation of $207,407

What Rate Of Return Will You Earn?

The second half of this exercise is to figure out how much you need to save each month to reach your target amount by the target date.

Unless you are getting a really late start and only have a couple of years until college, you’ll likely want to have your money invested.

Sure, you could put the money in a savings account and earn a safe 3% or so (in 2023). Achieving a big financial goal like this is a lot easier though when your rate of return is higher.

The average historical return for US stocks has been around 10% per year. Very few people invest 100% in stocks though. That’s why it’s important to think about how your portfolio impacts YOUR returns.

The rate of return is very personal based on how you set up your investments. But since we need something to continue in this exercise, let’s look at the historical returns of an 80/20 stock [VTI]/bond [BND] portfolio. From that backtesting tool, we see that the portfolio historically has a compound annual growth rate (CAGR) of 8.19%

How Much Should You Save Each Month?

Now we have all the necessary information to finish up our estimates. You can plug these last numbers into another online calculator to estimate your monthly saving needs.

Here is the online savings goal calculator that I used for this case study.

I entered my savings goal of $207,407, an estimated rate of return (they call it “interest rate”) of 8.19%, and 18 years.

The result is the monthly amount you should consider saving to be able to pay for your child’s college education when it comes time.

For the numbers I’ve been using in this example, the monthly amount is calculated to be $423.09.

Yes, it’s a lot of money, but it’s less than the average American car payment. It’s also less than most families spend on dining out each month. Plus, consider how much it would cost your child each month if they have to borrow this amount. It would essentially be like them trying to cover an additional mortgage payment – on top of their living expenses.


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Variables That Will Impact Your Results

There are a number of variables that will influence results when planning to pay for your child’s college education.

1. Which College

Which college your child attends will have a huge impact on the total amount needed. Private schools cost a lot more than public state schools. Community or technical colleges cost even less than state schools.

My wife and I both attended a local community college before transferring to a state college to finish our degrees. It saved our parents a ton of money.

There is a local community college here near us that estimates the average annual cost of attending to be right around $14,000. That’s right, just half of the state college cost! If your child lives at home while attending a local college (like I did) that will save even more.

2. Tuition Inflation Rates

We don’t know for sure at what rate tuition will increase in the future. There was a stretch not too long ago when it climbed about 8% per year. Recently it’s dropped into more reasonable ranges. Hopefully, we’ll start to see a plateau in prices, but no one really knows for sure.

3. Grants, Scholarships, And Transfer Credits

The amount of money your child can get from grants and scholarships can have a drastic impact on the total cost.

There are many grants available (like the Pell Grant) and the colleges will often work with you on these. Additionally, there are a ton of scholarships available. If you haven’t already, check out our tips on getting good scholarships – it can save a small fortune!

Consider transfer credits too. I don’t just mean transfers from another college, but that’s an option. Also, consider AP Classes from high school. Our daughter had enough AP classes to skip an entire semester of first-year classes. The savings can be substantial.


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4. Your Investment Returns

Whether you prefer DIY investing, an automated solution, or working with a financial professional – you will probably need to invest your monthly savings.

How you invest will impact your rate of return, which impacts the amount you need to save.

Getting a 5% return versus 7% means about another $100/month you need to save. Putting the money in a savings account earning only 3% means almost doubling your saving amount.

5. Your Child’s Age

The older your child, the shorter time you have to save. That means you’ll need to save more each month. The bit of good news there is that the tuition has less time to inflate, so your target total amount will be lower than someone with a newborn.

6. Your Current Savings

If you’ve already started saving – great! That last calculator actually has a place to enter your current savings. It can take that into account toward your total goal, which will mean less of a requirement to save each month.

BONUS TIP: Have your child work to earn and save money for college. Studies show that students who also have jobs tend to do even better in school. There are few situations where a child can’t work – at least in the summer – to help contribute some money toward their college expenses.

In Closing

Do you have children – or plan to have children? If so, have you gone through this exercise yet? Do the results of this planning process line up with what you previously expected? Let us know in the comments below.