If you're like many parents, you probably wish you could save more toward your child's college education. But after paying for housing, food, transportation, and other expenses, putting extra money away for college can be challenging. However, if your son or daughter will be entering full-time school soon, you might have more money available than you thought.
Your child care costs have probably been dropping as your child has grown, but on average, Iowa parents are still paying about $7,900 a year for a four-year-old in a center-based child care facility. Although you may continue to have some costs if your school district doesn't offer full-day preschool/kindergarten or if you need before or after school care, you should see some savings once your child enters elementary school.
Cost-savings to contributions
There are plenty of places you could direct that "found" money; however, you might want to consider contributing some of it to your child's 529 plan account. Let's say you no longer need any child care, which means you'd be saving around $7,900 a year. If you take 50% of that and put it in your 529 plan account, you'd be able to contribute about $330 a month. Continuing to contribute that same amount each month from the time your child goes to kindergarten until he or she turns 18 (about 13 years) could mean you'd have an additional $74,770 in your 529 account when it's time for college.*
Wondering how that amount will compare with the total cost of higher education? You can estimate future college costs for a specific school or type of school by using Vanguard's college cost projector.
For example, the current annual cost for one year of a four-year public college (including room and board) is $18,900. The estimated cost of that same year of public college 13 years from now is $40,312, or $176,351 for four years.* So, your additional savings could pay for about 42% of your child's total college costs.
This hypothetical example assumes an annual 6% return, and a monthly contribution of $330 for 13 years. This example doesn't represent any particular investment, or taxes, if any, payable upon withdrawal, nor does it account for inflation.
You do not have to cover it all
Don't be discouraged if you're not able to save anywhere near 100% of your child's college costs. You're far from alone. In 2014, parents hoped to cover 38% of the cost of college through a combination of income, savings, and borrowing, according to Sallie Mae. You may also be able to contribute more to your 529 account in the future if your income increases.
And don't forget that your child might be eligible for financial aid—and that he or she may be able to cover some of the costs. According to Sallie Mae, 56% of students in 2014 reported paying some of their college costs with income and savings.
To work out your personal savings goal, you can use Vanguard's college savings planner. Although college may seem far away, putting a plan in place now for how to cover those future costs will make it easier for you to reach your goals.