Most Millennial parents have more questions than answers when they decide they’re ready to open a college savings account for their young child

On this episode of the Millennial finance podcast Financially Well, I’ll talk about how to save money for college. In particular, I’ll discuss how you can save money for your child’s college education with confidence and satisfaction – even while your future financial needs and interests remain unknown.

The Reasons Why How to Save Money For College Remain a Mystery

Ron Lieber writes the “Your Money” column for the New York Times. In January 2021, he published a book entitled, “The Price You Pay for College.” In a chapter on making a college financial plan, he writes:

“Perhaps the greatest financial hazard is how nonlinear your life will likely be, with all that planning set against stock market crashes, periods of unemployment, illness somewhere in the immediate family, or a global pandemic. Hopefully there will be financial surprises on the positive side, too.

And in the background are the ever-rising costs of college (and health care, and housing) and unpredictability about what sort of higher education system any given five-year-old might be facing a dozen years from now. 

You’ll know for sure only a double-digit number of years from now, and then you’ll have a few weeks, if you’re lucky, to make an enormously consequential decision.

It’s not a pretty picture, and we shouldn’t expect it to get more rational, given how long it took to create such a broken system. Just try not to let the complexity of it all paralyze you into doing nothing at all to get ready.”

More College Questions Than Answers for Millennial Parents

I know that some of our listeners recently have been saving money for a down payment on their first home purchase. At various times during this process, you likely have browsed Zillow once, twice, or – more realistically – a thousand times. You probably also have attended one or more open houses. This research probably allowed you to clarify what type of house you want and the specific price range associated with that house.

Saving for college doesn’t come with the same quality or quantity of information as house hunting. In this respect, college has much more in common with retirement. We must save years in advance to maximize the chance that we have enough money for the goal we ultimately identify. But when we start, we often have very little idea what we want that goal to look like. This dynamic makes it difficult to understand how to save money for college. Most Millennial parents have more questions than answers when they decide they’re ready to open a 529 plan for their young child.

With this in mind, I want to share a couple of different approaches for saving and investing effectively, even if your child’s college destination is very uncertain.

Figuring Out How to Save Money for College is Exhausting

First, though, I want to put Ron Lieber’s reporting into context. I regularly discuss money with other Millennial parents, either as their financial advisor or through a financial wellness program. Almost every parent I meet wants to better understand how to save money for college. But I get the sense that even those who already have started saving still feel stressed, guilty, and/or all-around dissatisfied with the process.

Why? The specific frustration differs among parents, but they generally fall into a few common categories. Some parents wonder whether their effort eventually will prove futile. Will what they save even cover a meaningful amount of their child’s future college costs? Others aren’t sure how much to save for college each month or year. In many cases, this uncertainty creates a form of paralysis. As a result, these parents often hesitate to take any action at all. And, finally, a smaller group of parents wonders whether they might be saving too much, too soon. Are they short-changing their own retirement? Is their focus on how to save for college preventing them from using their money in valuable ways right now?

Making the Big College Savings Plan

These questions are all very valid. And they all relate to the aspect of “The Price You Pay for College” that I value most. Unlike an online saving calculator, Ron Lieber’s starting point for a candid conversation about how to save money for college isn’t with numbers. Rather, he first addresses your financial fears, expectations, past experiences, and overall uncertainty.

In discussing “how to make the big financial plan,” Lieber writes:

“Any discussion of big plans has to begin with a bow to the unknown, and there are so many things that we cannot know about the future in this context. If your children are small, you have no idea what sort of students they may be, with what sort of passions or wanderlust or drive.

But we grown-ups don’t know as much as we think about ourselves, either. Over five years or certainly fifteen or twenty, we can’t predict whether we’ll continue to enjoy our careers or how successful we’ll be. We know nothing about future economic cycles or even the trajectory of the one we’re in as you’re reading this. Our investments may do better or worse than we predict, and the irrational feelings resulting from big gains or losses may cause us to buy or sell the wrong assets at the wrong times. Health crises can strike at any point, and not just our own: an adolescent’s mental health crisis or an aging parent with a slowly progressing incurable condition can wreak financial havoc along with the emotional kind.

And how much do we really know about our own goals? How long do we want to work, if we have any say in the matter? How hard and where?”

Different Ways to Think About How to Save Money For College

This uncertainty, as Lieber wrote, shouldn’t lead us to take no action at all. Sure, we may not be able to predict the future. But what we can do is regularly revisit our values and financial circumstances. We can make decisions based on the best information that we have available to us today. That information may be imperfect. It may change. Still, it’s enough to make progress.

Lieber’s book offers two slightly different ways to think about how to save money for college. The first comes from Kevin McKinley, a financial planner in Eau Claire, Wisconsin. And the second one comes from me. 

“Thinking in Fractions”

Kevin McKinley suggests “thinking in fractions.” Lieber writes, “Take a family aiming to send one child to a state university or a private one that offers plenty of merit aid. Their all-in cost in today’s dollars might be $100,000. McKinley would have them divide that into quarters. The goal would be to save one quarter of the total, $25,000, through regular deposits as the child grows up. Then they’d pay $25,000 out of their current income during the four years of college, with the undergraduate working part-time during the school year and full-time during the summer. The remaining $50,000 could come from debt, with the student borrowing a bit more than half that total from the federal government and parents borrowing the rest from home equity or through a federal PLUS Loan or a private lender.”

Based on McKinley’s approach, if you assume a 5% annual rate of return over 18 years of savings, you would need to save about $75 per month to reach $25,000.

The Trouble with Specific Financial Targets

I think Kevin McKinley’s strategy is helpful for parents who, psychologically, really depend on specific numbers to guide their college savings decision-making. But I have a slightly different perspective on how to save money for college. And, just as importantly, how to support your financial wellness by minimizing the stress that college uncertainty – and saving in general – can create.

Most of the Millennial parents I meet have limited amounts of money to contribute to a 529 plan or other investment account. And they’re facing tough trade-offs with these dollars. Often, they’re still paying off their own student loans or preparing to buy a house. Or, perhaps they feel behind on their own retirement savings. In some cases, they really just need to take a vacation.

As a result, many of these parents will not be able to hit the specific savings targets that Kevin McKinley or other well-meaning financial experts prescribe. And what then? Many people feel very discouraged when they can’t accomplish a financial goal that they (in theory) “should” reach. And when you feel insufficient in these situations, you’re likely to procrastinate or ignore the subject altogether.

What about the parents with more fortunate circumstances? I work with some Millennial parents who have plenty of discretionary income to devote to college savings if they so choose. But they worry, “What if we overdo it?”

Saving What You Can, Based on Your Values

In my experience, the general answer for how to save money for college actually looks similar for both groups. Most college savings strategies should focus on contributing what you can, in light of your other commitments and values. It’s ok to limit your college savings contributions if you’re still burdened with student loan debt. It’s ok to have higher priorities than saving for a young child’s future college education. The key in these situations is just to contribute something each month or quarter. Even $25 counts.

On the other hand, you may value paying for college above most other possible uses of your money. Or you may have extra cash that you don’t plan to use any time soon. When your child is young, you have little to lose by investing in a college savings account. You will maximize the benefits of compounding, which generates new growth on top of the earnings you’ve already gained. And you always have the opportunity in the years ahead to reduce your contributions as new information about your child’s future materializes.

Feeling Empowered About How to Save Money for College

I hope my discussion about “The Price You Pay for College” empowers you to take some form of action for your family. For Millennial parents with young children, saving for college is a messy, non-linear experience. How much money can you comfortably commit to a 529 plan this year? Once you know, go for it. If you’re saving for multiple long-term goals, consider opening a taxable, non-retirement investment account. These dollars can be used for any purpose, including college, in the future. If you’re also working on building up your retirement account, keep in mind that Roth IRAs include several provisions that may also support your college savings goals.

You may wish you could do more today for your child’s college education. But extend yourself some grace knowing that your life, including your commitments and priorities, will change over time. As long as you understand how to save money for college amid different circumstances, the opportunities likely will exist to give your children exactly what you hope for them.

The Price You Pay for College

Thanks for listening today. If you’re a Millennial parent, I highly suggest you purchase Ron Lieber’s book. Again, it’s called “The Price You Pay For College.” I also encourage you to check out his writing at the New York Times and support him on social media. And, of course, subscribe to this Millennial finance podcast to learn more about how you can improve your own financial wellness in the year ahead.

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About Kevin Mahoney, CFP®

Kevin Mahoney, CFP® is the founder & CEO of Illumint, a Washington, D.C.-based company that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and 40s, such as repaying student loans, buying a house, saving for college, & learning to invest. In addition, Kevin also works as a financial wellness program provider to Millennial employees around the country, including group speaking engagements.