May 20, 2022
College planning isn’t often top of mind when baby makes three—but perhaps it should be. Recent Vanguard research notes that the earliest college savers tend to require lower monthly savings rates over time, have more flexibility when they need to pivot, and get a head start on understanding the sometimes-complex “sticker-price-versus-net-price-paid” college tuition puzzle. Here we offer five success-boosting strategies for families saving for college.
As with any long-term financial goal, getting an early start can increase the amount an investor is ultimately able to save. A longer savings horizon means there’s more time to sock cash away; it also allows for a more aggressive asset allocation, particularly during the early years. Compounding, of course, works best when assets have more time to grow.
“Getting started often creates a momentum that carries forward,” says Clifford Felton, wealth planning researcher at Vanguard. “And savers don’t need to get too hung up on the specifics at first; they won’t know which school Baby will ultimately choose, or what the precise costs will be, until much later. Just taking the time to open a college savings account—either a 529 or an after-tax account earmarked for higher ed—and setting up a simple monthly contribution schedule now can go a long way toward college funding success later.”
The numbers bear the just-get-started strategy out. Vanguard research has found that when parents start making contributions when the child is born, a 2.9% annual savings rate, averaged across the studied incomes, could be high enough for them to hit a realistic college-planning target. Wait until the child is 5 or 10 to start saving, and that rate jumps to 4.7% and 8.2%, respectively. This research spans a range of incomes, considers potential need-based aid, and assumes savings are made into a qualified 529 account with future qualified withdrawals.1
It may be difficult for many parents to hit these targets, especially as they adjust their budget to welcome a newborn. Felton suggests families starting by saving as little as $50 per month—or whatever the minimum monthly investment is for the family’s state plan—then increasing that amount as time goes on and their budget allows. It may not sound like much, but this strategy can forestall the need to play catch-up later.
Notes: Savings rates by age of child when savings begin are shown as a percentage of household income. The lower of the estimated Student Aid Index (SAI) and the projected in-state, public college costs serves as the floor value, while the upper serves as the ceiling value (except where SAI exceeds private-school costs, in which case projected private-school costs serve as the ceiling). SAI and listed total cost projections are for a family with two 30-year-old parents and one child born in the current year. Student is assumed to start college at age 18 and attend for four consecutive years. Parents are assumed to contribute income in equal amounts; student is assumed to have no personal assets. Schools are assumed to be either public or private, with the private category limited to not-for-profit four-year colleges. Present listed total cost averages—non-selective in-state public, $25,000; average private, $50,000; and very selective private, $70,000—are determined from IPEDS data.
Sources: Vanguard calculations, using data from VCMM, glide-path construction from Donaldson et al. (2020), which is specifically built for 529 plans, the National Center for Education Statistics’ Integrated Postsecondary Education Data System (IPEDS; available at nces.ed.gov/ipeds), and a wage scale modeled off the U.S. Social Security Administration’s wage index.
Of course, most savers have an upper limit for monthly contributions, and college savings is but one facet of most financial plans. Guardians would be wise to consider all of their financial goals—retirement, debt repayment, a financial legacy—and think about where college savings fits within those priorities. Then, they can allocate accordingly.
Published university costs can be dizzyingly high—but the gulf between these “sticker prices” and net price paid—can be profound. “Some of the most selective schools are posting sticker prices that are about $80,000 a year,” says Jonathan Kahler, senior manager at Vanguard Education Savings. “That can be an overwhelming number, particularly when a family accounts for all four years and the rising costs of tuition.” Add another college-bound kid, and the overwhelm can quickly compound.
Fortunately, the vast majority of families won’t pay that sticker price. Instead, they’ll pay what’s known as the net price, which subtracts any grants, scholarships, and education tax benefits a family receives from the advertised tuition rate. In fact, almost three quarters of all financial aid recipients are awarded scholarships or grants (the most attractive type of aid, because they don’t have to be paid back).2
“It’s useful to know that the most selective—and often the most seemingly expensive—schools are also the ones with the largest gap between sticker price and net price paid,” says Kahler.
The upshot? A family may have more schools within their financial reach than they might assume.
Notes: Figure shows average listed total pricing and net pricing across private not-for-profit and public four-year U.S. institutions by selectivity for the 2019–2020 school year. Median values are called out with horizontal lines. We used the 2018 Carnegie Classifications (carnegieclassifications.iu.edu) to remove any special-focus schools from the private universe. IPEDS only reports net cost information for private or in-district/in-state students for public schools; out-of-state net pricing for public schools is not available. Listed total pricing includes tuition and fees, books and supplies, on-campus room and board (if available; otherwise, off-campus not-with-family housing is used), and other campus expenses. Selectivity is based on average admissions rates from the 2010–2019 school years. We define public schools as selective if the average admission rate is lower than or equal to 80% and as non-selective if that rate is higher than 80%. We define private schools as very selective if the average admissions rate is less than or equal to 40%, as selective if that rate is between 40% and 80%, and as non-selective if that rate exceeds 80%.
Sources: Vanguard calculations, using data from the National Center for Education Statistics’ Integrated Postsecondary Education Data System (IPEDS; available at nces.ed.gov/ipeds).
A student’s goals, a family’s finances, and even available student aid opportunities are likely to change during the 18 years that a savings plan is in place. Once a strategy is forged, it’s a good idea to set regular checkpoints to assess progress and, if needed, to refresh goals.
“A lot of college cost comes down to consumer decisions—campus location, private versus public, regionality—that are ultimately within a family’s control,” says Kahler. “The earlier parents can incorporate those decisions into their planning, the greater their chance of funding the options that ultimately become available to their child.”
Kahler suggests checking in on progress and goals once a year—and whenever a major life event occurs. Marrying or divorcing, getting a substantial raise, having another child, or moving across the country or world: These are just some of the changes that can affect how much a family can save, financial aid opportunities, and even the school a child ultimately attends. Moreover, a student’s aspirations are likely to change or solidify as they move through high school.
As the time for college nears, an inventory of available financial resources can help a family craft an efficient order-of-spending plan. Student-, parent-, and grandparent-owned accounts hold different weights in the student-aid calculation, as do different account types (such as 529s, Roth IRAs, and taxable accounts). And, because aid is calculated anew each year, the order in which available resources are tapped as the student goes through college can have a significant effect on future years’ aid calculations. Check out Vanguard’s Financial Planning Perspective Tackling the Tuition Bill: Managing Higher Education Expenses for a deeper dive into this topic.
For many families, the cost of college can feel overwhelming or out of reach. The tips presented here, though, can go a long way toward making the college dream a reality.
1 Please review IRS publication 970 for additional information on qualified withdrawals.
2 Sallie Mae and Ipsos, How America Pays for College 2021, available on salliemae.com at HowAmericaPaysforCollege2021.pdf.
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