Multiply your child’s age by $2,000 to get a rough estimate, Fidelity says.
Saving for college is daunting, as the sticker price for even state schools edges ever higher.
To help families get a rough idea of whether they are on track to meet their college savings goals, Fidelity Investments is promoting a rule of thumb: Multiply your child’s age by $2,000 to get a back-of-the-napkin estimate of how much you should have saved at that point.
The number is based on a goal of saving half of the cost of four years at a public, in-state university, where the average cost in 2016 — including tuition, room and board, and fees — was more than $20,000 annually, according to the College Board. It assumes that savings start when a child is born and that he or she will start college at age 18.
The guideline assumes that the funds are invested in a tax-advantaged account, like a state-sponsored 529 savings plan (no surprise: Fidelity manages several such plans), or a Coverdell education savings account, which also has tax benefits, but much lower annual contribution limits.
According to the rule, if your child is 2, you should have $4,000 saved; if he or she is 10, you should have $20,000 set aside.
“It’s a reasonable number, when you look at public school costs,” said Keith Bernhardt, vice president for retirement and college products at Fidelity.
But why aim for saving just half the cost?
“Almost no one pays 100 percent of the cost right out of savings,” Bernhardt said. People generally pay for college with some combination of current income, grants and scholarships, and loans, in addition to savings.
Financial advisers say the rule’s simplicity may help families begin what often seems like an overwhelming task. Most parents should save even more, however, because investment returns are inherently uncertain.
“It’s catchy,” Robert Carroll, a financial planner with Carnegie Investment Counsel in Cincinnati, said of the so-called 2K rule. “But it’s a starting point.”
Lauren Haynes, a fee-only financial planner with Evolution Advisers in Midlothian, Virginia, said the 50 percent target included an expectation that most students would get some sort of assistance, but that may be optimistic. “Most of my clients are paying full freight,” she said.
Bernhardt acknowledges that the rule’s simplicity comes with trade-offs. For one thing, the average cost of a four-year private college is currently more than double the amount of a public school. So, if your child is gunning for the Ivy League, multiply the initial number from the rule of thumb times two, and the totals become more eye-popping. (For a 14-year-old, the formula is $2,000 times 14 times 2, for a total of $56,000.)
Fidelity also offers a customizable online calculator that lets you change variables, like the type of college and the percentage of college costs you want to save, to see if you are saving enough.
Mark Kantrowitz, a financial-aid expert, says rules of thumb are nothing new, but he prefers the “rule of thirds”: Aim to save a third of the cost of college, pay for a third out of current income and borrow a third.
While many parents recoil at the idea of borrowing — perhaps because they are burdened by student loans themselves — it can make sense to take on some student debt.
“A judicious use of debt is not unreasonable,” Carroll said, especially if parents are also trying to save for their retirement. Parents could continue to assist their child after graduation, he said, by helping with loan payments, if they are able.
Whatever rule you choose to follow, financial advisers recommend starting to save early. If you wait until your child is in middle or high school, you will have to save much more or rule out more expensive colleges.
Here are some questions and answers about saving for college:
Q: How can I get an idea of what I might pay at a specific college?
A: The federal government requires schools to offer a “net price calculator,” which estimates what you might pay after receiving grants and scholarships. A site that links to each school’s calculator is available online.
Q: Can funds in my 529 plan be used to repay student loans?
A: No. Legislation proposed in the House of Representatives would change that, said Young Boozer, chairman of the College Savings Plans Network, which represents 529 plans, but the bill’s future is uncertain.
Q: Will saving in a 529 plan affect my child’s financial aid?
A: Yes, it can affect need-based financial aid, but the impact is generally small. Boozer said that if the account is owned by a parent, or by a dependent student, the money is assessed at a rate of less than 6 percent when figuring the family’s expected financial contribution for college. “It has a minimal effect,” he said, and should not deter families from opening an account. The Saving for College website offers more details.
This article originally appeared in The New York Times.