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July 3, 2010 / Suzie

Suzie’s Five Steps to Calculating How Much to Save for College

I’m going to take this a few steps back and talk about how to save for college. The process can be complicated, and the results expensive, but it is better to plan and have savings than to avoid the figures and be screwed in the future.

Step 1: Determine what kind of college you would like to attend.
Most students have these five options (data found from CollegeBoard’s Average Cost Calculator):

  • Four-year private school, in-state: average ($26,273 per year average, subsidized by state scholarships if applicable)
  • Four-year private school, out of state ($26,273 per year average)
  • Four-year public school, in-state (check your state schools for this information)
  • Four-year public school, out of state ($11,528 per year average)
  • Two-year public school, in-state ($2,544 per year average)

Expect tuition to increase by at least 8% every year, so the average cost of a four-year private school out of state would be $26,273 + $28,274 + $30,536 + $32,978 = $118,062 over four years, whereas a four-year public school, out of state would be $11,528 + 12,450 + $13,446 + $14,522 = $51,945. That’s more than half the cost of a four-year private school! Note that the rate of inflation varies from school to school. The scary thing is that this is before you incorporate room and board, which can run anywhere for $4,000 a year to $12,000 (in other words, it can be another $16,000 to $48,000 total), depending on the school. In sum: college is expensive and you need to start figuring out how you’re going to pay for it now!

Step 2: Consider the rate of inflation
Are you planning on going to college this year? Next year? In five years? The cost of college, as stated earlier, is rising, so it’s important to take that into account when planning for the future. Using About.com’s inflation calculator (a conservative 4%-6%), it’s easy to figure out the beginning cost of college. Take the expected tuition and multiply it by the numbers below, judging how long one has until college hits.

  1. 1.05
  2. 1.10
  3. 1.16
  4. 1.22
  5. 1.28
  6. 1.34
  7. 1.41
  8. 1.48
  9. 1.55
  10. 1.63
  11. 1.71
  12. 1.80
  13. 1.89
  14. 1.98
  15. 2.08
  16. 2.18
  17. 2.29
  18. 2.41
  19. 2.53
  20. 2.65
  21. 2.79
  22. 2.93
  23. 3.07
  24. 3.23
  25. 3.39

Wicked expensive! So if someone is saving for a $10,000 a year college now, but has 25 years to do it, that means that that college, on average, will be $33,900 by the time s/he starts. Whew!

Step 3: The rate of return is here to save you
If Step Two freaked you out, don’t worry. Thankfully there is a good rate of return if you start saving early. At an average of 8%, a 529 plan (educational IRA) can seriously bolster your chances of getting to school. Same math as before, but this time with your savings:

  1. 1.08
  2. 1.17
  3. 1.26
  4. 1.36
  5. 1.47
  6. 1.59
  7. 1.71
  8. 1.85
  9. 2.00
  10. 2.16
  11. 2.33
  12. 2.52
  13. 2.72
  14. 2.94
  15. 3.17
  16. 3.43
  17. 3.70
  18. 4.00
  19. 4.32
  20. 4.66
  21. 5.03
  22. 5.44
  23. 5.87
  24. 6.34
  25. 6.85

So if you start with $10,000 in savings, and you save it for 25 years, that will turn into $68,500. Woot!

Step 4: Doing the Math
So now that you know your current savings rate, how long it is until you’ll be in college, and what schools will cost, you can plug in some math. Say you’re a student with $10,000 in the bank with four years to go through high school, and plan on attending an out of state college. Take the $10,000, multiply it by the savings rate in Step 3 (1.36), take the initial cost of college ($11,582), and multiply it by its starting rate in Step 2 (1.22) times the years of college you plan to attend (4). This individual would have $13,600 saved for $56,582. That’s a $42,920 deficit, so let’s talk financial aid and some savings plans.

In addition to the already deposited $10,000, this family would have to invest more money to save for school to make up the deficit. Given an 8% rate of return, divide by this investment chart, given how long one has until college.

  1. 1.08
  2. 2.25
  3. 3.51
  4. 4.87
  5. 6.34
  6. 7.92
  7. 9.64
  8. 11.49
  9. 13.49
  10. 15.65
  11. 17.98
  12. 20.50
  13. 23.21
  14. 26.15
  15. 29.32
  16. 32.75
  17. 36.45
  18. 40.45
  19. 44.76
  20. 49.42
  21. 54.46
  22. 59.89
  23. 65.76
  24. 72.11
  25. 78.95

Sticking with the previous example, with a deficit of $42,920 and four years until college, this family would have to put away $8,813 a year to fully cover everything. Not possible? Thank God for financial aid and scholarships!

Step 5: Work hard and get good grades
With most families, college is an investment that you can’t account for fully. Scholarships can cover up to the full cost of college. Those grades matter! If not, student loans have been the go-to for folks who can’t deal with the $50,000 – $100,000+ bill for higher education. The key to avoiding these unknowns is to start saving as early as possible!

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