College Savings Optimization

November 14, 2021

Topics: Tax tips | College | 529 Plans | UGMA | Custodial

Media type: Article, Podcast

College Savings Optimization

6.6 minute read • 

November 14, 2021

When your baby turns three, planning for college isn’t usually at the top of the list — but maybe it should be. A recent study by Vanguard notes that early college savers tend to have lower monthly savings rates over time, greater flexibility when adjustments are needed, and sometimes complex “mark versus net.” Paying for “the college headache.” Here, we offer five strategies to make it easier for the family to save for college.

Early savers could see big gains

As with any long-term financial goal, starting early can increase the amount an investor can ultimately save. A longer savings horizon means more time to put money aside; it also allows for more aggressive asset allocation, especially early on. Of course, compound interest works best when the asset has more time to grow.

“Getting started often creates ongoing momentum,” says Clifford Felton, wealth planning researcher at Vanguard. “And savers don’t even have to worry too much about the details; which school, or exactly how much it costs. Just take the time to open a college savings account – a 529 or after-tax account dedicated to higher expenses. – and create a simple monthly contribution plan now, which is ideal for future graduate funding success.

These figures confirm the strategy that has just begun. The Vanguard study found that when parents started contributing at birth, the average annual savings rate for the studied income was 2.9%, which is enough to allow them to reach realistic goals of university planning. Wait until kids are 5 or 10 to start saving, and the savings rate will jump to 4.7% and 8.2%, respectively. The study covered a range of incomes, considered potential help based on need, and assumed savings in a qualified 529 account with qualified withdrawals in the future. 1

Achieving these goals can be difficult for many parents, especially as they adjust their budget to welcome a new baby. Felton recommends families start with a minimum monthly savings of $50 — or the Family State Plan’s minimum monthly investment — and then increase that amount over time and according to their budget. It may not seem like much, but this strategy can save you from having to catch up later.

Starting early helps keep the program manageable

Three graphs arranged horizontally show projected savings rates for different income levels, grouped by age when children start saving for college:

Newborn (left), 5 (middle) or 10 (right). The y-axis represents the savings rate as a percentage of income and applies to all three charts. Each chart has its own x-axis, which represents household income when parents are 30 years old. Income ranges from $25,000 to $300,000 and is presented in increments of $25,000 across each x-axis for a total of 11 data points. Alt text for left chart:

Left chart shows that for parents who start saving when their child is born, the projected savings rates range is 1.1% to 6.4% if their household income at age 30 is $50,000, 2.5% to 4.3% if it is $75,000, 3.2% to 3.2% if it is $100,000, 2.6% to 3.6% if it is $125,000, 2.1% to 3.8% if it is $150,000, 1.8% to 3.9% if it is $175,000, 1.6% to 4.0% if it is $200,000, 1.4% to 4.0% if it is $225,000, 1.3% to 3.6% if it is $250,000, 1.2% to 3.3% if it is $275,000, and 1.1% to 3.0% if it is $300,000. Alt text for center chart:

Center chart shows that for parents who start saving when their child is 5, the projected savings rates range is 1.9% to 10.6% if their household income at age 30 is $50,000, 4.0% to 7.1% if it is $75,000, 5.3% to 5.3% if it is $100,000, 4.2% to 5.9% if it is $125,000, 3.5% to 6.2% if it is $150,000, 3.0% to 6.5% if it is $175,000, 2.6% to 6.7% if it is $200,000, 2.4% to 6.6% if it is $225,000, 2.1% to 5.9% if it is $250,000, 1.9% to 5.4% it is $275,000, and 1.8% to 4.9% if it is $300,000. Alternative text for the image on the right:

The legal table shows that parents who start saving when their children are 10 can expect to save between 3.2% and 18.3% if their household income is $50,000 at age 30, and 7.0% to 18.3% if they have $75,000. 9.2% to 9.2% 7.3% to 10.2% if $100,000 6.1% to 10.8% if $150,000 5.2% to 11.2% if $175,000 11, 5% if % to 11.5% 4.6% to 11.5% to 11.5% % if $225,000 3.7% to 10.3% if $250,000; 3.3% to 9.3% if $275,000; 3.1% to 8.6% if $300,000.


Savings rates by age of child at start of saving are shown as a percentage of household income. The lower of the estimated Student Aid Index (SAI) and projected costs of public colleges in the state is used as the floor and the higher is used as the ceiling (unless the SAI exceeds the costs of private schools, in which case projected private school costs as a ceiling). The SAI and total cost projections shown are for a family with two parents aged 30 and one child born in the current year. Students are accepted into the university at the age of 18 and study for four consecutive years. Suppose parents contribute equal income; assume students have no personal assets. Schools are assumed to be public or private, with the private category being limited to non-profit four-year colleges. Total average costs currently listed – in-state non-elective public, $25,000; medium private, $50,000; $70,000 – determined from IPEDS data.

The source:

Vanguard’s calculations, using data from the VCMM, built from slides by Donaldson et al. (2020), National Center for Education Statistics Higher Education Integrated Data System “IPEDS; available at” designed specifically for the 529 plan, and salary tables modeled after the US Social Security Administration salary index. Integrate saving for college into a larger financial plan

Of course, most savers have a cap on their monthly contributions, and saving for college is just one aspect of most financial plans. Tutors would do well to consider all of their financial goals—retirement, debt repayment, financial legacy—and consider where college savings fits into those priorities. They can then be assigned accordingly.

Understand the difference between “list price” and net price

Published tuition fees can be incredibly high, but the gap between these “list prices” and the net price paid can be huge. “Some of the most selective schools have a sticker price of around $80,000 a year,” said Jonathan Kahler, senior executive at Vanguard Education Savings. “That can be an overwhelming number, especially when a family pays for all four years and tuition goes up.” Add a kid about to start college, and the stress can escalate quickly.

Fortunately, the vast majority of families will not pay this price. Instead, they will pay what is called the net price, which subtracts the scholarships, scholarships, and education tax benefits the family receives from the published tuition. Indeed, nearly three-quarters of financial aid recipients receive a grant or scholarship (the most attractive type of aid because it is non-refundable). 2

“It helps to know which schools are the most selective — and often the most expensive — and also which have the biggest spread between list price and net price paid,” Kahler said.

result? A family may have more schools than they can afford with their financial means.

Depending on the type of school and household income and assets, the difference between the gross price quoted and the net price can be significant.

The Fiddle table provides average gross and net enrollment prices by school type and selectivity. The x-axis represents the type of school. The y-axis represents the cost of attendance per year. For each category for which data exists, the gross price shown exceeds the net price. For many elite private schools, the gross prices listed range from $14,100 to $86,257, with a median of $74,488; net prices range from $4,938 to $47,413, with a median of $27,190. For elite private schools, gross prices quoted range from $3,401 to $77,400 with a median of $47,584; net prices range from $1,488 to $58,297 with a median of $23,026. For non-selective private schools, gross prices reported range from $12,033 to $74,264, with a median of $44,464; net prices range from $4,999 to $41,217, with a median of $23,182. For some out-of-state public schools, the reported total price range ranges from $5,050 to $70,937, with a median of $38,388. There is no net price. For public selective public schools, the gross price range shown is $5,050 to $47,681 with a median of $26,364, while the net price range is $2,958 to $27,675 with a median of $14,360. For non-selective out-of-state public schools, total prices listed range from $20,994 to $56,852, with a median of $35,298. There is no net price. For public non-selective public schools, the total price range shown is $18,255 to $33,718, with a median