Are you saving enough for college? Here's what to know

Student loans. Student loans. Student loans.

With tens of millions of federal student loan borrowers returning to repayment, my inbox has been brimming with questions about student loans and various repayment rules.

But I've also been hearing one intriguing question, over and over, that isn't directly about loans or repayment, so much as it is about how to avoid them entirely. And it's coming from parents of kids who've not yet traded in their sticker collections for student loans.

"I've got one little guy who's about six years old," Caleb Queern, of Austin, Texas, told me recently. "And my questions are, number one: How much should we be saving between now and the time my little guy is ready for college? And number two: What's the best way to save for it?"

These feel like evergreen questions, but there seems to be concern, among some parents, that the answers may finally be changing color. With the sticker price for a four-year degree high and rising, as well as the burden of student loan debt, it's reasonable for young parents to wonder: Are we saving enough? Should we be doing something differently?

For answers, I reached out to the guy who wrote the book on the price you pay for college. No, really. He wrote the book, The Price You Pay For College. Ron Lieber is the Your Money columnist for The New York Times, and is right now rolling out a new online course for college-curious parents about the mysteries of merit aid.

What follows is our conversation, which has been edited for length and clarity.

Are state-managed 529 college savings plans still the best way for parents to save for their child's college education? And how much saving is enough?

It's good to save for college if you possibly can, and save as much as is reasonably possible. So, you know, that's not a mathematical, algorithmic formula. But it is true that the earlier you start, the more chance that money has to grow. And these 529 plans do offer tax advantages. They may save you money on state income taxes in the year that you put money away. And then when you take the money out, maybe as much as 20 or 25 years later, you don't have to pay any taxes on the growth in that money. And that's a federal tax break. So you may get state tax breaks and a big federal tax break. And, you know, that can be worth [a lot] in savings on taxes that you would have otherwise had to pay if you save enough early on. It's good to lock money away for a particular purpose where you know that it's there when you need it.

Where is the balance between putting money in your child's 529 and saving for your own retirement? Is one more important than the other?

There's this old adage in financial planning circles that says: You can't borrow for retirement, so [prioritize] putting money away for retirement, [since] you can borrow to pay for an undergraduate education. Well, that turns out not to be true. You can borrow in retirement via something called a reverse mortgage. So, you know, it's sort of false on its face, but it gets to the difficult emotional components here, right?

Most of us would not have had children in the first place if we did not intend to put them first. We want them to be better and do better and have more and do more than we were ever able to ourselves. So it's easy to get in a mode of sacrifice. But the challenge there is that if you take every extra dollar that you have and put it towards their education over time, you may end up working until 75 or 80 or 85. And if you can't work, then they might be in a sort of reverse inheritance where they're paying for your expenses all those years later. So there isn't any calculator or math equation that can predict the future, but you can in the present ask yourself, 'Well, how much college is really going to be enough for this kid or these kids? And must we save, you know, the $400,000 list price for four years at NYU? Must we have that saved by the time our kid turns 18? And if so, at what cost to the first 18 years of that kid's life?'

Or, can we take a more reasonable approach and say, 'Hey, what if we tried to put away a quarter or a third of what a flagship state university would cost? Why don't we see if we can pull that off and see what kind of student we have on our hands? And then maybe that kid can work a whole bunch in college, and maybe we take on an extra gig or we don't take any vacations for five years or, you know, lower our grocery bills. And then maybe we borrow the rest.' And the parents borrow half of the remaining amount and the kid borrows the rest. Pretty soon you've paid for a couple of great educations at your flagship state university or a local branch or community college. And, you know, for so many kids, that's going to be a fantastic experience. And it's not cut-rate at all. It's not being cheap. It's the very definition of success.

You mentioned parents borrowing. I've spent a lot of time talking with parents who took out parent PLUS loans to help pay for their child's education, and many of them are quite unhappy and uncomfortable now. How do you feel about parent PLUS loans?

So the federal parent PLUS loan – that's an expensive product. There's a big upfront fee. The interest is high. I'm always reluctant to recommend that people borrow too much from there. But how much is too much? There's not all that much underwriting and there's no cap. You can borrow the entire $400,000 for NYU if you want to. And quite often the federal government will let you. It's crazy. Now, most people won't do that. But again, it's tempting to do as much as we can to, you know, allow our kids to fulfill their dreams.

Again, if you can manage to save a quarter of the cost of, you know, a more reasonable price tag instead of NYU – maybe it's your local state university, right? So you put $25,000-$30,000 away in the first 18 years of your kid's life, and then you scrimp and save and find a way, you know, during the next four years to pay for another third of the education out of your own pockets. Maybe that's a parent working extra or taking a job with more compensation. Maybe it's the kid working 15 hours a week during the school year and [more] during the summer, paying some of their own way. Pretty soon now you've paid 50%, 60%, 80% of the cost and then whatever's left, well, you know, the kid can take out $30,000 in undergraduate student loans and change – I think $31,000 is the cap now. And then perhaps the parents can borrow the rest.

At that point, the parent borrowing load is maybe $10,000 or $20,000 or $30,000. This is not an outrageous amount of money. The people I worry about are the people that have not managed to save anything, that don't have much income and still go to the federal PLUS program and borrow a six-figure amount of money where the monthly payments are going to be $1,000 a month and they just have no hope of paying it back.

You've mentioned flagship universities several times, and I'm wondering if there is a qualitative difference between a degree from a selective, elite college versus a flagship state university, considering the former might require more loan debt than the latter.

Well, I'm glad you're teasing out the distinction between quantitative and qualitative. It is perfectly reasonable to take a hard-nosed look at this with the green eyeshade and say, 'For the degree that my 17 year old is certain that she or he wants, the average graduate from X University will earn Y, and the average graduate from Z University will only earn A, ergo, go to this school or not that school.'

I understand why the quantitative return is important to a lot of people, but there is also the return on friendship. There is the return on mentorship. There is the quality of the lived experience at a particular school. This is four years of your life. And so I do not begrudge anyone who is thinking about things that are harder to measure.

Now, that sounds like a dodge of your question, but it is just absolutely the case that when you are purchasing a service and that service will be rendered over four years or maybe five in many cases, there are all sorts of factors that go into measuring its value and trying to determine what you're willing to pay for it. So I just encourage people to ask really expansive questions of these institutions, and then ask themselves really pointed questions:

Are you going for the education?

Are you going to find your people? The friends who will pick you up and carry you through life.

Are you going to find the mentors who will turn your brain inside out?

Are you going for the credential that will allow you to be an accountant or a nurse?

Are you reaching for a different kind of credential that can open doors to rooms that you would not otherwise have the standing to get in?

As a parent saving for college, how do you know when you're doing it right?

The system of financing and paying for residential undergraduate education is intensely complicated. It is not the fault of the parents who are trying to navigate it. The pricing is opaque and the discounting is unpredictable. So to the people who are confused I say, 'I hear you. I feel you. And I am in fact living it as a parent of a high school senior right now. Don't beat yourself up.'

So much of the type of financial responsibilities that used to be taken on by the state or by employers are now being dumped in heaps on the American populace. And, you know, as a parent, trying to raise a good human and put that human out in the world, it's just so emotionally complicated.

Save as much as you reasonably can. Any amount is better than no amount. And remember, if you can't put anything away at all, that's not a sign of some sort of personal moral failure of yours. There is a thriving community college system in this country. Kids meet the most incredible peers in those classes. There are dedicated teachers. The cost is low, especially if they can live at home with you. And many of those schools have transfer agreements with fantastic state universities where you can then go off and do your last two years.

This does not have to be a six-figure proposition. It does not have to be a $400,000 proposition. It certainly can be. And I'm not saying that it's wasteful if anybody spends that much, but there are so many ways to navigate through this system and turn out a 22 year old who is thrilled and, you know, has had their brain grown by 5X. And if you can't pay for all of that upfront, it doesn't mean that you've done something wrong as a parent. [Copyright 2023 NPR]