How to Calculate and Plan Education Costs

In the context of financial planning, saving for your child’s tertiary level education is a luxury. However, if you can afford the luxury, there are calculators and systematic methods that could be utilised in planning. Planning for your child’s college education should involve more than arbitrary investments. Before this activity is undertaken, you should have the following information:

a) Child’s current age
b) The child’s age when the plan should mature
c) Tuition inflation rate
d) Present costs of select courses, tuition and other expenses
e) The number of years that the education plan should provide for
f) The accumulation rate on education savings

Once you have all the relevant information, you should get your hands on a financial calculator. Spreadsheet applications contain financial functions as well, even though they are not as useful as an inexpensive financial calculator. The following steps should be taken to determine the size of investment that you need to make.

1) Project the future cost of education- The variables involved are N (Number of years left until the fund is needed), PV (Present cost of education), I/Y (Tuition inflation rate). From these variables, the FV of education costs would be determined. This value or a fraction of it would be your savings target. It is important to use the actual rise in education costs represented by the tuition inflation rate. This rate would be different from headline inflation. If it is unavailable, you can use the percentage change in fees from a particular college as a guide.

2) Determine how many years education costs will be covered- For subsequent years, the education costs used will be the Future Values calculated for the previous year. If you are planning to cover four years of education, you would actually have four future values.

3) Once the aggregate cost is determined, the amount you need to save on a modal basis can be calculated based on a given interest rate. The education plan utilised should at least keep abreast of the tuition inflation rate. It is important to diversify savings for education, given that the accumulation period is very short.

Saving for education may be prohibitive for the average household. For middle-income earners, it may be best to use an education plan to subsidise the future costs. Fully covering your child’s future education expenses may be unrealistic. Attempting to do so may even jeopardise your own financial plan. In any event, the value of calculation methods in systematic planning is indisputable.