After struggling to pay for college themselves, Millennial parents don’t want their children to face the same burden.
Young parents — many of whom are still paying off their own student loans — are planning to pick up the tab for their kids, much more so than previous generations.
Nearly half of parents in their early thirties intend to foot their kids’ full college bill. That’s compared to just 16% of parents the same age in 2007, according to a new report from Fidelity.
They’re putting their money where their mouth is, too. On average, they have about $1,500 socked away for their kids’ future higher education, $500 more than young parents had saved previously.
But those savings don’t exactly put them on track to cover their children’s entire college bill.
“Millennial parents are much more ambitious and optimistic about covering their childrens’ college costs, but they’re not ahead of the game,” said Keith Bernhardt, VP of retirement and college products at Fidelity.
It’s difficult to say how much exactly they should be saving, he said.
Two-year or four-year school? Public or private? How long will it take to graduate? Those factors all come into play and it’s not realistic to assume what your 5-year-old will want.
Last year tuition, fees, room and board cost an average of $18,943 a year at a four-year state school and $42,419 at a private college. But most people don’t pay the full “sticker price” of tuition. When taking grants into consideration, the average student paid $12,833 at a state school and $23,549 for private, according to The College Board.
Bernhardt suggests using an online net price calculator to get a rough estimate. Pick three or four schools in your area, some private and some public. Most should have an online calculator tailored to their own institution. The College Board has a more general calculator online.
While it’s hard to know how much you’ll need to cover the cost of college, Bernhardt offers three pieces of advice: start saving early, use a dedicated savings account like a 529 plan, and set up automatic contributions.
More and more parents are using a 529 account to save for college. As long as you use the money for higher education-related costs, any investment gains won’t be taxed. The money is yours, but you’ll be hit with a 10% penalty to use it for other things. If your child receives a scholarship, you can take that same amount out to use how you want without incurring the penalty.
Don’t worry about savings affecting your chance of getting financial aid, which is heavily based on your income rather than your savings. Anything in a 529 account won’t significantly bump up your expected family contribution.
“If you think you’ll need financial aid, you’d have to save a lot of money to get boxed out of it,” said Bernhardt.