Saving for college is one of the biggest goals for many advisor clients, and probably the most important after saving for a house.
The costs can be almost as large and in some cases even larger. Tuition, fees and room and board average almost $21,000 at four-year public colleges for in-state students and almost $47,000 at a private nonprofit school for the 2017-2018 academic year, according to the College Board. Multiply each number by four and you get an idea of how much a college education costs based on its sticker price, assuming a student graduates in four years.
Many families won't pay the sticker price, but how much help they will get in grants and scholarships is unknown until a students is accepted. About one in eight undergraduates will receive a private scholarship, and the average size is around $4,200 a year, says Mark Kantrowitz, publisher of savingforcollege.com.
Close to 42% who attend a private school will receive a grant, averaging $9,700 annually, and about 25% will get a state grant from a public institution averaging about $3,600. There are also federal Pell grants for those who qualify.
Even a middle-class student attending a private school who receives an average grant and scholarship would have to come up $33,000 per year for school.
Keep in mind that the higher the income of the family and the expected family contribution (as tabulated under the Free Application for Federal Student Aid, which is required when applying for aid), the less likely they will qualify for grants or scholarships.
Given the high cost of college, many advisor clients — along with their advisors — will need to calculate how much money to save over time to help pay for college. With that in mind, we looked at many college cost calculators in order to find the best of the lot.
There are many calculators. Individual schools have them; so do financial firms like Vanguard and Fidelity, 529 savings plan funds run by financial firms or individual states and online services devoted to college financing issues.
There are two main types of college cost calculators: calculators for families who don't have any idea which college or university their child or children will attend and calculators for those who do. The latter group can access the net price calculators that are available on the websites of individual colleges or through the U.S. Department of Education Net Price Calculator Center. All colleges and universities were directed by the Obama administration to post a net-price calculator on their websites in late October 2011. ThinkAdvisor tried out many of these calculators, all online, and here's what we found.
General College Cost Calculators
These calculators ask a few key questions that can help families get an idea about how much they should be saving to pay for their child's higher education.
They usually start with the cost of college. Families can input an average cost for a public institution, usually for an in-state resident, a private institution or a specific school.
Then they factor in a college cost inflation rate, the percent of costs a family plans to cover and the number of years until college. The result is the amount of money a family needs to save to pay for all or part of their child's college education. Often the results suggest the needed additional savings via a 529 savings plan.
Many calculators also include how much money a family has already saved and expects to save on a monthly or annual basis, which provides a more complete picture about funding needs.
Calculator Assumptions
This is how many college cost calculators differentiate themselves.
College cost calculators make assumptions about the cost of college now, the annual rate of inflation in college costs and the annual return rate of returns on college savings. The calculators use default numbers that users can usually adjust.
Take the annual cost of a generic private college. The cost calculators from Vanguard, Fidelity, American Funds and the College Board all assume the costs are under $50,000 annually, when in reality many private colleges charge over $60,000. Total annual costs for New York University in the 2018-2019 academic year exceed $70,000.
A family who expects their student will attend a private institution for four years could be underestimating the cost if they use the lower cost estimates and if the student doesn't qualify for any grants or scholarships. Families would therefore be better off entering the name of an actual college their child may attend if that's known.
Most of these calculators assume college costs will increase 5% or 6% annually, but costs for private nonprofit and public higher-ed institutions have been rising at a rate of 3.4% annually or less since the 1987-1988 school year, according to the College Board.
The calculators also assume that savings will earn annual returns between 5% and 8% annually, which doesn't seem like much, but consider this: Since 2000, the S&P 500 has earned an average 3.6% to 5.5% with reinvested dividends. Moreover, as the start date of college nears, it's unlikely that families will have all of college savings invested in stocks. They will likely have pared stock portfolios and added short-term bonds or CDs, which return less than stocks, to preserve capital.
Calculators We Like
Vanguard's college cost calculator was simple to use but comprehensive and issues a report filled with graphics illustrating how much more money a family needs to save each month to meet its college savings goal. The goal, for example, could target saving enough to fund 50% or 100% of college costs.
We also liked Bankrate.com's calculator, which, like Vanguard's and others, issues a report noting how much more a family needs to save per month.
