How Much Do I Need to Save for College?

There's a reason the average Class of 2016 college graduate came away $37,172 in debt. With the price of higher education continuing to rise, many parents are struggling to cover their kids' college costs.

If you have children and are thinking of starting a college fund, you're probably wondering: How much should I save? What will college tuition look like in 10 years? And what's the best way to sock away money for higher education? Here, we'll cover some of the basic costs of college and provide guidance on how to prepare for this colossal expense.

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How much does college cost?

In the absence of a crystal ball, there's no telling what college will cost in a decade from now or more. Though there's talk of the college bubble eventually bursting, you should know that college costs have climbed roughly 5% per year over the past 10 years. If we apply today's numbers, we can get a sense of what college might cost down the line.

According to The College Board, tuition and fees for the 2016–2017 school year averaged:

• $33,480 at private colleges
• $9,650 at public in-state colleges
• $24,930 at public out-of-state colleges

These numbers, however, don't include room and board, which can add $10,000 or more per year to the cost of higher education. But if you're looking at in-state tuition only at a public school, you might pay close to $16,000 per year for your child to attend in 10 years' time.

Now if the situation seems hopeless, you're not alone. Many parents struggle to save for college, and the amount you'll ultimately need will depend on the number of children you have and their specific educational choices. But if you save your money efficiently and start doing so when your kids are young, you stand a good chance of making a respectable dent in those tuition bills.

Consider a 529 plan

You have several choices for saving for college, but a good one to think about is the 529 plan -- an option more than 40% of savers are using. The primary benefit of a 529 is that it allows your money to grow on a tax-free basis. As long as you withdraw that money to pay for qualified higher education expenses, you'll get to keep your investment gains in their entirety without losing a portion to taxes.

Traditional brokerage accounts, by contrast, require you to pay taxes on your earnings year after year, which leaves you with less money left over to reinvest. And though traditional brokerage accounts do offer more flexibility (you can use your money for any purposes, not just college), if you do happen to overfund your 529, the worst that will happen is that you'll pay a 10% penalty on your investment gains -- not your principal contributions.

Let's say you contribute $40,000 over 10 years to your 529, and have a total of $52,000 by the time college rolls around thanks to your investment gains. Now let's apply an extreme situation and assume that your child no longer wants to attend college at all. Even under these circumstances, you'd only be subject to a penalty on $12,000 in gains, and you'd only lose $1,200 in total. On the other hand, if your child were to choose a college whose cost totals or exceeds $52,000, you'd get to benefit from $12,000 in tax-free earnings.

Start early

While a 529 plan can be instrumental in saving efficiently for college, the key is also to start as early as possible -- ideally, from the moment your child is born. As is the case with all investments, the more time you give your money to grow, the more you stand to accumulate over time.

The following tables shows how much you stand to accrue based on your savings horizon:

TABLE AND CALCULATIONS BY AUTHOR.

As you can see, if you begin saving for college when your child is just a newborn, you can turn $64,800 in contributions ($3,600 a year x 18 years) into over $111,000, which represents a good $46,000 gain. And if you invest with a 529 plan, that $46,000 will be yours free and clear of taxes.

While the idea of funding a college education might seem downright impossible, if you start early enough, you can grow your savings into a rather respectable sum. In the above example, that $111,200 would likely suffice in covering four years of in-state tuition plus room and board, even if the student in question won't be attending for another 10 years.

Finally, remember that while saving for college is important, it shouldn't trump key goals like retirement. There are other options for paying for college, from student loans to scholarships to work-study arrangements, and if you don't save enough to cover your kids' costs in full, there are other ways to make things work.