By Investopedia AAA

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.

    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

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