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How to plan for college savings

How to plan for college savings

Even small changes in your financial planning assumptions can lead to massively different potential outcomes. These assumptions can include expected investment returns, expected inflation, and your annual savings. This is especially true over longer time frames, due to the power of compounding, as well as all the unforeseen circumstance we all face. Because no one can see into the future, I like to analyze a range of possible scenarios for my family’s financial planning. This allows me to take comfort in the fact that even in a worse-case scenario, we will still be able to achieve our financial goals.

Crystal ball


Let’s look at the impact small changes in financial assumptions can have on saving for college. In a future blog post we’ll do the same analysis for retirement planning.

College Planning

Figuring out how much to save for college is challenging given how many unknown variables there are: the cost of college, your investment returns, and if your child will get a scholarship or other type of financial aid. As a result, the amount you need to save to fund a college education can vary a lot. Using my college savings calculator (bottom of the page), you can compare different scenarios based on changes in the cost of college and expected investment returns.

Scenario 1)

You have a newborn and you are excited to start saving for college. You want to fully fund the cost of a 4-year public school, which currently costs $30,000 per year. The chart below shows that you would need to save between $357 per month and $694 per month based on expected annual investment returns and expected college inflation rate. That’s a massive range!

4-Year Public School

4 year public school


Scenario 2)

This time you decide to fully fund the cost of a 4-year private school which currently costs $60,000 per year. The chart below shows that you would need to save between $714 per month and $1,389 per month based on expected annual investment returns and expected college inflation rate. Again, this is a massive range and highlights the power of compounding over a long time period.

4-Year Private School

4 year private school

The actual range of how much you need to save each month per child, ranges from $357/month to $1,389 per month depending on whether you decide to fund a 4-year public school or a 4-year private school, as well as your assumptions for investment returns and college inflation. 


Given this wide range, how can we narrow the possible outcomes?

• The biggest factor is your decision to pay for a 4-year public or 4-year private school. That decision is ultimately up to you but saving for a 4-year public school reduces the amount you need to save by about 50%. If you’re not sure whether you want to save for a public or private school, I recommend splitting the difference rather than massively over saving for college.


• For the college inflation rate, I use a 2% college inflation rate for my family’s planning, driven by the fact that college inflation rates have been slowing over the past few years, and COVID-19 could lead to permanently lower demand for higher education. In fact, the college inflation rate declined In August by 0.7%, the largest drop since 1978! If you want to be conservative you can use a 3% inflation rate, but I think 1-2% is reasonable, given how easily you can make adjustments over time.


• For expected investment returns, I use a 5% expected return and I believe 4-6% is a reasonable estimate over time. No one can predict how financial markets will perform over the next 18 years but given low expected returns on bond and high equity multiples, it would be challenging to earn an average 7% rate of return over the next 18 years.


• Finally, the closer your child gets to starting college, the range of possible outcomes will naturally shrink. In the future you should have a much better sense of how much college will cost, hopefully you will have decided whether you want to fund a public or private school, and you’ll have a better sense of your child’s aptitude in school and potential for a scholarship.


The most important thing is just to start saving as soon as you can, assuming you can afford to. Even saving $50 or $100 per month will add up over time. And you can always adjust your savings based on changes to your financial situation. I recommend reevaluating your college saving plan every year or two to make sure you are on the right track to hit your goals. Additionally, I would encourage you not to over save for college, especially since most people have other competing financial goals such as saving for retirement or paying off a mortgage. Furthermore, it’s possible your child gets a substantial scholarship, decides not to go to college, or low-cost remote education options become much more prevalent. I also think it’s possible that the cost of college will be lower in 18 years than it is now, although I’m not counting on that scenario.

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