Project what college will cost when your student starts, and work out the monthly saving needed to cover all of it or a share.
College prices tend to rise faster than most things, so the calculator grows today’s yearly cost by the rate you enter. If college starts in three years, the first year costs today’s figure grown for three years, the next year grows once more, and so on for each year of study. Adding those years gives the total cost you would pay at the time.
A dollar saved today can earn a return before it is spent. The calculator takes your return rate, removes the tax rate, and uses what is left to bring each year’s cost back to its value today, assuming each year’s bill is paid at the start of that year. The monthly saving is the amount you would put away each month, from now until the last year of college is paid, so that the savings plus their growth cover the target. Any savings you already have reduce the amount still to save.
Many families expect grants, scholarships, student loans or other aid to cover part of the bill. Enter the share you plan to pay from savings and the calculator works out the target for that share as well as the monthly amount. Use a tax rate of 0% if the money is in a 529 plan, where growth is tax-free when spent on qualified education costs.
Take today’s yearly cost, grow it by the expected yearly increase for each year until the student starts, and then keep growing it for each year of study. The calculator does this and adds up all the years.
It is the value today of all the future bills, discounted by your after-tax investment return. It is the amount that, if saved now and invested, would grow to pay for college.
It is the level monthly amount, from now until the last year begins, that together with its after-tax growth reaches the target in today’s money. A balance you already have is taken off the target first.
Use your combined federal, state and local tax rate on investment returns. If you save in a 529 plan and spend the money on qualified education costs, use 0%.
The savings you already have, valued today, are at least as large as the target in today’s money. With that balance invested at your return rate, it should cover the goal without further saving.
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