The only guide you'll ever need to saving on college | step by step

BY KEN CLARK -
Introduction

While there are plenty of college cost and savings calculators available online, it's wise to compute it by hand at least once. Doing so gives you a better sense of whether or not other estimates are in the right ballpark.
Here are the basic steps for calculating your future college costs, as well as the required annual savings to meet a shortage in funds:

Determine What Your College of Choice Costs Now

Perhaps the most important step in calculating future college costs is getting an accurate estimate of what it would cost if you enrolled at today's rates. The most accurate source of this information is generally found on an individual college's website under the "Financial Aid" section.
If you have no idea about where your child might go to school, or you would like to just calculate a rough estimate, you can use the national average tuition rates found on numerous internet sites like CollegeBoard.com.
These sites often give an average rate for tuition at the three different types of colleges.
For example:
4 Year Private College - $23,000 per year
4 Year Public College - $6,500 per year
2 Year Public College - $2,500 per year
Make sure the number you end up using also includes room, board, and books.

Determine What Your College of Choice Will Cost in the Future

Whereas the normal annual rate of inflation in our economy has averaged about 2%, college costs have actually increased at a rate of 4-6% per year. In other words, where you can expect a $10,000 car to cost $10,200 in twelve months, you can also expect $ 10,000 in tuition to cost as much as $10,600 during the next school year.
To help you estimate how inflation will affect your child's tuition, we've included a simplified inflation table. Simply multiply the current annual cost of your selected college by the number located next to the years remaining until college begins.
For example, a student who would like to go to a school costing $10,000per year, with fifteen years until college begins, would have to pay $20,800 for one year ($10,000current tuition multiplied by 2.08). This would also roughly equate to $83,200 for four years of college at that same school ($20,800 multiplied by four years).
Inflation Multiplier Table:
Years Until College = Multiplier
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
*Assumes a 5% rate of inflation and rounded to two decimal places.

Determine What Your Current College Fund Will Be Worth

Before you become totally immobilized by that gigantic increase in your expected college costs, you need to stop and consider what your current college investments will be worth in the future.
If you currently have money set aside, it will hopefully grow to a significant amount over the same period of time that college costs inflate. Thus, in figuring your real shortfall, and in turn what you need to save each year, you'll need to figure out how much you'll already have.
We use a multiplier similar to the one used in the last step to calculate the future value of your current investments.For example, if the same student with fifteen years until college has $5,000 in their college account, it should grow to approximately $ 15,850 ($5,000multiplied by 3.17).
Years Until College Multiplier
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
*Assumes an 8% rate of return and rounded to two decimal places.

Determine What Your Future Shortfall Will Be

Now that you know the future cost of college and the future value of your existing investments, you can begin the process of determining how much money you'll need to make up the difference.
In addition to subtracting the future value of your investments from the future cost of college, you'll also need to subtract your expected financial aid. The result is the total amount that you will be short when college begins.
To continue with the example, the student with fifteen years until college will need approximately $83,200 total to pay for four years of school.
The student's existing college fund will be worth $ 15,850, reducing their total future shortfall to $ 67,350($83,200 total cost minus $15,850 future savings value).
The student also expects to receive $30,000 in financial aid, further reducing their shortfall to $ 37,350($67,350 remaining cost minus $30,000 in financial aid).
Thus, this student's unmet need, also referred to as their "shortfall", is $37,350. This is the amount that needs to be planned for if a parent wishes to avoid the financial crunch associated with college.

Determine What You Need to Save Each Year to Cover the Shortfall

Now that you've calculated your estimated future shortfall, the only thing left to do is determine how much you need to save on a regular basis to cover the difference.
Now, instead of multiplying to calculate the amount of annual savings needed, you will divide. For example, using the chart below, you would divide your total shortfall by the divisor for fifteen years ($37,350shortfall divided by 29.32).
This gives you a result of $1,273.87, which is the required annual savings to meet the $37,350 shortfall, assuming an 8% rate of return on your investments.
Years Until College Divisor
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
*Assumes an 8% rate of return and rounded to two decimal places.

Begin Investigating Your Savings Options

Congratulations! You've managed to solve a financial planning problem that many planners do not know how to calculate by hand. More importantly, you've mastered some of the basic concepts behind how college costs increase, as well as how someone goes about meeting those costs.
Now that you have a good idea of what your are going to need to save for each of your children's college education, you can begin figuring out what types of investment accounts are most appropriate for you.