Estimating College Costs and Savings Programs

The first step in financial planning for a college education is to estimate realistically how much college costs will be. College costs can be separated into two categories: direct and indirect.

Direct college costs include tuition, fees, room and board. Information concerning direct costs is available from each particular institution. Additionally, publications are available that provide information about college expenses.

Indirect college costs include other necessary educational expenses, such as books and supplies, transportation, medical coverage, clothing, recreation, and other personal expenses. These indirect costs vary considerably among students, and are, therefore, more difficult to estimate than direct college costs. Contact the financial aid office at the institution you are interested in for information concerning typical indirect expenses of students in a particular area.

Once you have gathered information concerning the current direct and indirect costs of college, you can project those costs into the appropriate year.

The College Costs Work Sheet can help you determine the amount of money you will need, as well as suggest the amount that you should save monthly, quarterly, or annually to reach that goal.

College Costs Work Sheet

	Example	Your Figures
1. Enter current total annual cost of college of your choice.	$6,000	$ __________
2. Multiply amount in Step 1 by 4 to arrive at 4-year cost.	$24,000	$ __________
3. Enter the number of years until your child reaches college.	12	__________
4. Using the number of years in Step 3, select an inflation factor from Table A below.	(7%) 2.25	__________
5. Multiply 4-year cost in Step 2 by inflation factor in Step 4. This is the projected amount that must be saved prior to your child's attending college.	$54,000	$ __________
6. Select from Table B the investment factor that coincides with the annual investment return you expect to receive after taxes.	(6%) .057	__________
7. Multiply the inflation-adjusted 4-year cost in Step 5 by the investment factor in Step 6. This is the amount that you will need to save annually. Divide by 12 or 4 to determine your monthly or quarterly savings goal.	(Monthly) $256	__________

Table A: Annual Inflation Factor

Years to College	Inflation Factor
Years to College	6%	7%	9%
4	1.26	1.31	1.41
5	1.34	1.40	1.54
6	1.42	1.50	1.68
7	1.50	1.61	1.83
8	1.59	1.72	1.99
10	1.79	1.97	2.37
12	2.01	2.25	2.81
14	2.26	2.58	3.34
16	2.54	2.95	3.97
18	2.85	3.38	4.72

Table B: Annual Investment Factor

Years to College	Investment Factor
Years to College	6%	7%	9%
4	.233	.214	.206
5	.173	.164	.156
6	.140	.131	.123
7	.116	.108	.100
8	.098	.090	.083
10	.074	.066	.059
12	.057	.050	.044
14	.046	.039	.033
16	.038	.031	.026
18	.031	.025	.020

Evaluating Savings Programs

Once you have realistically estimated the amount of money that will be needed to meet college expenses, you must find a place to save, or invest, your money. Many savings and investment options are available; therefore, you should seek expert advice. Professionals from banks or credit unions, financial planners, or stock brokers can help you make the savings or investment choice that best fits your needs.

Consider the following criteria when you select a savings program:

Investment Contribution. Does the investment require a one-time contribution, irregular contributions, or monthly contributions? Is there a minimum or maximum contribution size?

Convenience. Will it be simple to establish the account, or will it require a lot of paperwork? Will you need the assistance of an attorney?

Ownership of the Fund. Do you want the money to be in your child's name, even if you cannot get it should the child decide not to go to college, or if you need the money for an emergency? Do you want your child to have control of the money now, in the future, or at all?

Risk. The younger the child, the greater the investment risk a parent can assume. For example, a parent starting a college fund for a 15-year-old may not feel comfortable investing in higher risk alternatives such as stocks, while a parent starting a college fund during the child's first year might be willing to assume such a risk.

Tax Considerations. Will your investment contributions be with before- or after-tax dollars? Will earnings be tax exempt, tax deferred, taxed as ordinary income in your tax bracket or your child's tax bracket? There are tax savings if investments are made in the child's name. Before age 14, the first $550 of investment income is tax free, and the second $550 is taxed at 15 percent. Any amount above $1,100 is taxed at the parent's rate. Once the child reaches age 14, all income is taxed at the child's rate.

Carefully considering these five criteria can help you determine which savings vehicle is the right one for your situation.

Another consideration in selecting a savings program for college expenses is your child's age. The savings program should be matched to your child's age. For example, if your child is young, the best investment might be one that yields long-term growth. However, if your child is older, you may prefer safer investments that are more liquid.