Is there a standard ratio of college savings to retirement savings?September 15, 2011: 5:05 AM ET
Is there a standard ratio of college savings to retirement savings? I understand that retirement always comes first, but I was just wondering if there was an accepted guideline. -- Josh Levin, Colorado Springs, Colo.
There is no standard ratio of college savings to retirement savings, says Mark Kantrowitz, publisher of Finaid.org. While it's true you can borrow for education costs and you can't borrow for retirement, the goal of course is to save enough for both. Here are a few rules you should follow for saving for college, advises Kantrowitz.
1. Use the one-third rule. Aim to save about one third of projected future college costs. Where does the rest come from? Another third will come from your current income and financial aid. The final third will come from your future income—or your kids'—in the form of loans. The idea here is to spread the cost of paying for college over a lifetime, which makes the hefty proce tag more manageable. When calculating how much to save, keep in mind that college costs increase by about a factor of three over any 17 year period.
2. Save in a tax-advantaged 529 college savings plan. You save after-tax dollars in 529 plan, but the growth is tax-deferred, and if used for qualified higher education expenses, withdrawals are entirely tax-free. Plus, 34 states and the District of Columbia give you a state income tax deduction or credit for your contributions to the state's 529 plan.
3. Student debt at graduation should be less than the student's expected starting salary—ideally, a lot less. Students who borrow more than their expected starting salary will have to use alternate repayment plans, like extended repayment and income-based repayment, to afford their monthly loan payments. Students who borrow more than twice their expected starting salary are at high risk of defaulting on their student loans, which can ruin their credit rating.
-- Walecia Konrad
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