The College-Savings Rule Many Parents May Not Know About

When your family starts to grow with precious little ones, there is a lot to think about, including saving for their future education. College isn't getting cheaper and can put a huge financial burden on a family. In fact, Research.com recently reported the average price of a private college tuition is approximately $35,000 per year and public universities are averaging $9,000 per year for in-state students and $23,000 per year for out-of-state students.

To get a better understanding of what parents should know about saving for college, Money Digest spoke with an expert on the topic, Alaina Fingal, Certified Money Coach and owner of The Organized Money. "Saving for college can feel overwhelming for most families, especially with the current costs of living expenses," said Fingal. "I believe that most families make the mistake in believing that they should pay for their child's college costs in total with their personal savings. Don't try and do it all with your savings account. Most families will use a combination of current income, savings, and loans as a way to cover all of the expenses."

The one-third rule is a popular method for college planning that many parents may not be aware of. This method takes a realistic approach to family finances and gives parents plenty of time to save what they need without overtaxing a household budget that also has to accommodate daily needs like food, utilities, childcare, and rent or mortgage payments.

Many experts encourage families planning for college to use the one-third rule as a means of balancing out the financial burden of saving for college. "The one-third rule says that you should consider paying for one third of college costs with savings, one third with loans, and one third with current income," explains Fingal. "You could also include grants and student's income as well. This eases up the pressure of trying to have the entire amount for college in your savings account or having a really high loan balance."

Those loan balances are a serious concern for many Americans trying to better their lives or the lives of their children through education (keep in mind, there are several types of loans that could send you to the poor house). Research from the Education Data Initiative, which gathers and analyzes data about the U.S. education system, found that the current total student loan debt in the United States is $1.753 trillion, with the average individual student carrying a debt of $40,681 to pay for college.

By following this one-third rule, you can save gradually over time, making it easier to set aside an amount that works with your household budget. This will allow you to Increase and decrease the amount you set aside to accommodate any financial emergencies or windfalls your family may experience along the way and will ensure that you can still afford to take proper care of your family without compromising the future of your child's education.

The key to successfully saving for college, in addition to following the one-third rule, is to start early and be consistent with your efforts. This will help you avoid taking on a massive debt that will follow your children into adulthood and possibly impact their own ability to save for the future.

"The top mistake that I have seen," Fingal told Money Digest, "is waiting too long to get started with preparing financially for college. Every dollar that is saved in advance is one less dollar that you will have to prepare. Planning ahead of time can also help you with your overall strategy. You can decide if you are going to do the one-third rule, beef up savings, or pursue grants and scholarships."

Rather than using a traditional savings account to save for college, many families opt for something known as a 529 plan, a tax-deferred savings plan designed to help pay for college expenses. These state-sponsored plans offer two different options, a savings plan or a prepaid tuition plan, and according to Best Colleges there were 15.9 million plans across the country as of mid-June 2022. And don't forget to pursue those grants and scholarships that your child may be eligible for. They can be obtained from a variety of sources, including the U.S. Federal Government, and can be a tremendous help for families who are worried about the cost of college.