Education Planning - Funding

A. Needs analysis
Calculating the amount of money that needs to be saved on a regular basis to help cover the cost of sending a student to college is a four-step process:

  • Estimate education costs in current dollars
  • Project future education costs in inflated dollars
  • Determine the required lump-sum investment
  • Calculate the required periodic investment
  1. Estimate education costs in current dollars
    The starting point for estimating future education costs is finding an appropriate figure to represent current costs. The appropriate figure will depend on whether the student in question is likely to attend a public or private institution, a particular school and what, if any, the student will be expected to contribute.

    Example:
    The average cost for tuition, fees, room and board in 2006-2007 at public colleges and universities was $12,796, according to the College Board.
  2. Project future education costs in inflated dollars
    Use time value of money calculations to project what college costs are likely to be when a child of a particular age will be ready to enroll. A component of this calculation will be an inflation rate at which college costs are expected to increase. Historically, the tuition inflation rate has exceeded the overall inflation rate.
  3. Determine the required lump-sum investment
    This calculation solving for present value determines how much would need to be set aside now to ensure sufficient funds are available when a student enrolls.
  4. Calculate the required periodic investment
    Most parents will not have sufficient funds set aside now to finance a child's education without further investing.
Education-Related Tax Incentives


Related Articles
  1. Personal Finance

    Is An American College Education Still Worth It?

    The total cost of a university education continues to outpace inflation. For some degrees, that expense isn't likely to pay off.
  2. Personal Finance

    Student Debt Passes $1 Trillion: Is College Worth the Investment?

    As tuition rises faster than any other U.S. commodity in the past few decades, students explore alternative education options supported by new technology.
  3. Personal Finance

    5 Colleges That Are Slashing Tuition Costs

    Schools are cutting tuition fees because of the economic times. We tell you which ones are cutting prices.
  4. Personal Finance

    Benefits Of Concurrent Enrollment

    College tuition is rising. See what you can do for your child now to give them a head start.
  5. Budgeting

    Pay For College Without Selling A Kidney

    Save thousands of dollars on tuition with these tricks and little-known programs.
  6. Entrepreneurship

    Go To College Or Become An Entrepreneur?

    The rising cost of higher education and high unemployment rate following the Great Recession has caused many young people to question the value of college.
  7. Professionals

    The Declining Value Of A College Degree

    The salary difference between adults with post-secondary educations and adults without post-secondary degrees isn't as drastic as it once was.
  8. Savings

    Stop Procrastinating! Enroll In A College Savings Plan

    The cost of sending your kids to college could be a serious financial burden - unless you get prepared. Now.
  9. Credit & Loans

    Should You Care About The Rising Cost Of College?

    It’s nearly graduation season, so it’s time to weigh in on why you should care about rising college costs, paying for tuition and back student loans.
  10. Budgeting

    4 Ways to Get a Degree Without Taking on Debt

    Although taking out student loans has become the norm in recent times, it is possible to get a degree without the burden of debt.
RELATED TERMS
  1. Lifetime Learning Credit

    A provision of the U.S. federal income tax code that lets parents ...
  2. Student Debt

    Money owed on a loan taken out to pay for educational expenses. ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently ...
  4. 529 Prepaid Tuition Plan

    A tax-advantaged method for paying future college tuition costs ...
  5. Prepaid Tuition Program

    One of the two major types of 529 plans. Prepaid tuition plans ...
  6. Stafford Loan

    A type of federal, fixed-rate student loan that was available ...
RELATED FAQS
  1. What are some examples of how I could use my IRA savings for college?

    Use your traditional IRA for qualified college expenses for you or your family. The retirement funds can be used for books, ... Read Answer >>
  2. Can I contribute to both a 529 plan and a Coverdell education savings account?

    You can contribute to both, and when your child is ready to attend college, as colleges do accept payments from both. There ... Read Answer >>
  3. Is it legal to invest my student loan money?

    Take a risk investing student loans and encounter a legal and moral gray area as well as possible financial challenges along ... Read Answer >>
  4. How much should we put in a 529 each year to pay for college for two kids?

    If we have two kids, three and one years old, and assume we are on track for retirement, how much should we potentially put ... Read Answer >>
  5. What are the most common sources of funds given in a financial aid award letter?

    Read this article to learn about the four most common sources of funding given in a financial aid award letter sent to a ... Read Answer >>
  6. Student loans, federal and private: what's the difference?

    Learn about the differences between federal and private student loans, and discover the types of federal funding available ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center