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How To Calculate The Cost Of A College Education

By Jason Markum

College is just about one of the most important expenses you will ever incur throughout your entire life. Besides buying your home, it could very well be the most expensive thing you ever pay for. And the prices just keep climbing! Even with careful planning and long-term savings. The cost of a college education is becoming unaffordable for a large part of society.

Which means that it is more important than ever to calculate the true cost of a college education and start saving as soon as is humanly possible. In this article, I’m going to talk about the cost of a college education and give you some tips on how to plan accordingly.

The first thing to note is time. It is incredibly important to plan for education savings as early as possible. It’s not ever to soon to start planning. As soon as your children are born you should put a plan in place. If you didn’t start that soon, don’t worry; you can still play catch-up but you need to get started right away.

Next it’s important to be realistic about the cost of college. These days, even state schools could run close to 10 or $12,000 a year! Elite private colleges are nearing $50,000 a year or more as of 2010. Harvard, for instance, cost around $37,000 a year in tuition alone. That doesn’t count room and board, textbooks, and other incidental expenses. When you add up all of those things the price shoots to nearly $60,000 per year!

Let’s create a quick example. Imagine that you have an eight-year-old daughter and you want her to go to a specific school that costs around $12,000 a year today. Basically were looking at around 10 years left for you to start saving.

How much is that $12,000 a year college going to cost by the time your daughter is old enough to attend? Let’s assume inflation is running around 5% a year. For the most part colleges tend to increase their prices at the nominal rate of inflation.

Also to clarify, let’s say that that $12,000 will cover everything including tuition, room and board, books, and all other incidental expenses. Calculating for inflation, you will need just over $80,000 to pay for four years of college at the current growth rate of 5% per year.

Luckily you won’t need $80,000, because you have 10 years to invest during which time your investment can earn interest which compounds on top of more interest, and that’s the name of the game. Assuming that your investments increase at 8% per year, and they increases tax-free… you can expect to invest around $36,000 over the next 10 years in order to meet the $80,000 fee.

Check with the financial aid office of the college that you have your eye on. Quite often they will have investment worksheets that you can print out that will help walk you through the costs involved and show you how much you need to invest before hand at different interest rates, over different time periods, in order to finance your children’s education. And no matter what, the earlier you start the better.

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