College Savings Calculator

Article byHarsh Katara
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

What Is College Savings Calculator?

A College Savings calculator can calculate the amount required to cover the education cost when the child is ready to enter college. Such a tool is very handy for making an estimate of possible future costs of college education and make provisions for the same.

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For eg:
Source: College Savings Calculator (wallstreetmojo.com)

College savings calculator

P / (( ( 1 + r )n*F – 1 ) / r)


Wherein,
  • P is the college amount required at a particular year.
  • r is the rate of interest.
  • n is the number of periods for which savings shall be made.
  • F is the frequency of interest is paid.
amount required at a particular year
$
rate of interest
%
is the number of periods
%
is the number of periods
$

It is widely used for making personalized projections that will give the parents or guardian an idea about how much they should save or invest in order to accumulate funds their child’s higher education. In the current competitive world, it is extremely necessary to not only plan in advance but also follow a disciplined approach towards education to avoid any unforeseen difficulty.

College Savings Calculator Explained

The college savings calculator is a very useful tool that helps in making an estimate of the probable expenses that a candidate planning to pursue a particular course may incur and how much they should save related to it. It acts as a guidance for taking decisions about the funds that should be kept aside for it.

There are many factors that are to be considered in savings calculator for college, like the income of the family, the type of college and kind of course the candidate wants to pursue. Different courses and colleges offer fee structure that may vary depending on the future benefits of the course and infrastructure of the institution.

The formula for calculating College Savings is below:

Periodical College Savings is made, then the calculation:

i = P / (( ( 1 + r )n*F – 1 ) / r )

Wherein,

  • i is the amount required to be saved
  • P is the college amount required in a particular year
  • r is the rate of interest
  • F is the frequency of interest is paid
  • n is the number of periods for which savings shall be made.

College Savings Calculator, as defined earlier, can be used to calculate the amount that an individual will want to save for his child for his future education expenses, which doesn’t become a liability on that individual as the cost of education is more. It increases with the rate of inflation. One can calculate the number of estimated expenses when the child enters college, consider the time left for investment, and save the amount periodically, either monthly or annually, as per the individual standards. College expenses are no longer cheap and are increasing as time passes, so the individual must save the amount beforehand, earn the same, and fund their child’s expenses without hesitation.

How To Calculate?

One needs to follow the below steps in savings calculator for college in order to calculate the amount for funding college expenses.

Step #1 – Determine the child’s age and the gap between their current age and the age he would be entering into college.

Step #2 – Estimate the college expenses for the entire period and determine the future valueDetermine The Future ValueThe Future Value (FV) formula is a financial terminology used to calculate cash flow value at a futuristic date compared to the original receipt. The objective of the FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money.read more as those expenses will increase with inflation.

Step #3 – Now, determine if any savings have already been made.

Step #4 – Determine the interest rate and divide the interest rate by the number of periods the income shall be paid. For example, if the rate paid is 4% and compounds semi-annually, the interest rate would be 4%/2, which is 2.00%.

Step #5 – Now, use the formula discussed above to calculate the amount required to be saved periodically depending on case to case.

Step #6 – The resultant figure will be the amount required to be saved to fund the college expenses.

College savings is a necessary step that all candidates should concentrate on from an early stage so that by the time they go to college, they have enough money to pursue their dream course. The calculators are quite easy to use for such cases and has facilities and options that not only brings clarity but also extract necessary information regarding the candidate and the course that helps in better decision making.

They help to create a very effective fund management strategy that will have the capacity to cover all expected and also unexpected cost during those years. But some topics like scholarships or attendance costs cannot be entered in these calculators because they are not fixed in nature. Different colleges offer different amount for scholarship levels and attendance cost also varies depending on the college.

You can download this College Savings Calculator Excel Template here – College Savings Calculator Excel Template

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Example

Let us understand the concept with the help of a suitable example as given below.

Mr. Akshay, a proud father of Mr. Karthik, has groomed his son very well and is performing well in his studies. His son is currently nine years old. However, Mr. Akshay is a middle-class person, and he understands that when his son reaches the age of 18 years, the college expenses will be high, and he also considers an inflation rate of 2%. His college will last for four years, and his college expenses will include Tuition fees and Room and board expenses of $10,000 each year. Mr. Akshay has shortlisted a scheme wherein he will invest monthly and earn interest on the same 10% per annum. Further, no pre-investment is made by Mr. Akshay, and he wants to save $150 per month starting today.

Based on the given information, you are required to calculate the monthly savings Mr. Akshay is required to make and whether he requires increasing the savings amount, reducing the same, or meeting the requirement. Assume monthly compounding for investment.

Solution:

We are given the below details:

  • I = Initial savings are Nil
  • i = The monthly savings need to be figured out
  • r = Rate of interest, which is 10% and is compounded annually
  • F = Frequency which is annually here; hence it will be 1
  • n = number of years the College Savings proposed to be made will be different from retirement age less current age (18 – 9), which is nine years for 1st-year fees. Similarly, for second-year fees, we have 11 years, 12 years, and 13 years, respectively. Fees are paid at the end of the period.
College Savings Calculator Example 1

The inflation rate is 2%, so the fees will not be fixed and will increase so that we will calculate the future value of the fees.

FV = (P * ( ( 1 + I ) ^ N – 1 ) / I) – (P * ( ( 1 + I ) ^ N – 1 ) / I)
Example 1-1 (FV)
  • = ($10000 * ( (1 + 2% ) ^ 13 – 1 ) / 2%) – ($10000 * ( (1 + 2% )^ 9 – 1 ) / 2%)
  • = $146,803.32 – $97,546.28
  • = $49,257.03

Similarly, if we calculate the individual year FV, we get the below results for years 10, 11, 12, and 13, and the total would be the same as we calculated.

For example, for year 10:

FV = (P * ( ( 1 + I ) ^ N)
College Savings Calculator Example 1-2
  • = (10000 * ( ( 1 + 2%) ^9)
  • = $11,950.93

Similarly for Years 11, 12 & 13

  • FV(Year 11) = (10000 * ( ( 1 + 2%) ^10)

                        = $12,189.94

  • FV(Year 12) = (10000 * ( ( 1 + 2%) ^11)

                        = $12,433.74

  • FV(Year 13) = (10000 * ( ( 1 + 2%) ^13)

                         = $12,682.42

Example 1-3 (Total Amount)

Now, we can use the below formula to calculate the amount required to be saved.

i = P / (( ( 1 + r )n*F – 1 ) / r)

For each future value, we shall calculate, and we shall use the nominal rate of interest, which is 10%.

College Savings Calculator Example 1-4
  • = 11,951 / (( ( 1 + 0.83% )10 * 12 – 1 ) / 10.00%/12 )
  • = $58.34

Similarly for years 11, 12 & 13

  • For (Year 11)= 12,190.02 / ((( 1 + 0.83% )11 * 12 – 1 ) / 0.83% )

                           = $51.03

  • For (Year 12) = 12,433.82 / ((( 1 + 0.83% )12 * 12 – 1 ) / 0.83% )

                           = $44.98

  • For (Year 13)= 12,682.50 / ((( 1 + 0.83% )13 * 12 – 1 ) / 10.00%/12 )

                            = $39.89

Therefore, the total monthly savings he is required to make is $58.34 + $51.03 + $44.98 + $39.89, which equals $194.24, and he is saving $150 and needs to increase the amount by 44.24 dollars a month.

Saving for the education of the child is a long-term plan, like that of retirement savings, and requires an early start in order to meet the target amount. These calculators act as a goal setter for such savings. Very often, parents get overwhelmed by the cost that they may need to bear for their child’s higher education. However, making a systematic plan and designing a suitable funding method can help a lot. A good plan will also include the scholarship, any financial aid, and current household income to calculate the future expenses of the college.

As discussed above, the College Savings calculator can be used to calculate the amount of savings that the individual can make to fund the expenses in the future and save themselves from immediate huge cash outflow or from taking any loan for education and thus also saving from paying interest on a loan.

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