# Calculating How to Pay for College

## A Step-by-Step TutorialTutorial 18

Paying for a college education (or several of them!) takes planning.

The most frequently asked question is "How much do I have to save to pay for college?" To accurately answer this question requires a calculator that is capable of handling multiple cash flows - a series of investments followed by a series of withdrawals. (Typically, college payments are due at the start of each semester and will be made for 3.5 years.) The Ultimate Financial Calculator is the financial calculator to use for just such a scenario.

All users should work through the more detailed first tutorial to understand the Ultimate Financial Calculator's (UFC) basic concepts and settings.

Assumption: We assume that a year of college will cost \$60,000. This is a very rough estimate (before inflation) for a four year, private, college based on information from collegedata.com as of 2022:

In its 2022 report, Trends in College Pricing and Student Aid, the College Board reports that a moderate college budget for an in-state student attending a four-year public college in 2022-2023 averages \$27,940. For out-of-state students at public colleges, the average budget comes to \$45,240, and for students attending private colleges, the average budget is \$57,570.

The point of this tutorial is not to debate what the future cost of college will be, but rather to teach you how you can plan to pay for college. Naturally, you can adjust our assumptions based on your particular expectations.

How long do you have to invest for college? We give you two different examples.

### Example 1

To create a savings schedule with an unknown investment amount and a series of withdrawals, follow these steps:

1. Set "Schedule Type" to "Savings"
• Or click the [New] button to clear any previous entries.
• The top row of the grid will not be empty
2. Set "Rounding" to "Open balance — no adjustment" by clicking on {Settings} {Rounding Options}
3. In the header section, make the following settings:
1. For "Calculate Method" select "Normal".
2. Set "Initial Compounding" to "Daily".
3. Enter 5.0 for the "Initial Interest Rate".
1. In row one of the cash flow input area, create a "Deposit" series
1. Set the "Date" to "July 1, 2024"
2. Set the "Amount" to "Unknown"
3. Set the "# Periods" to 258
• 21.5 years
• Assumes student born in first half of 2024.
4. Set the "Frequency" to "Monthly"
• Calculated "End Date" will be "December 1, 2045"
• Monthly investments stops when student is 21.5 years old
1. Click on the second row of the cash flow input area. Select "Withdrawal" for the "Series"
1. Enter the "Date" as "July 1, 2042"
• The fastest way to set the date is to type the 8 digits
• Note the overlapping dates - the withdrawals start before the investments stop
2. Enter the "Amount" as 30,000.00
• Estimated semester expenses
3. Use the [Tab] key to move to "# Periods". Set it to 8
4. Set the "Frequency" to "Semiannually"
• Assume 8 semester payments 6 months apart
• Payments start year student is 18
• Before calculating, your screen will look like this (Fig. 1):
• Above illustrates complex cash flow
• First withdrawal date is about 3.5 years before last investment. (See the end date in the first row vs. the date in the second row?)
• Investment frequency is monthly while withdrawal frequency is semiannual
1. Calculate the unknown. The result is \$560.82. Fig. 2
• Invest \$560 every month for about 21.5 years at 5.0% and you'll be able to pay for college.
1. Click the [Schedule] button
• Schedule clearly shows monthly investments continuing after withdrawals start

### Example 2

Compare above to the more traditional way of thinking about saving for college. The below calculates the amount you need to save each month with the same assumptions but for one change. This time, we will assume the entire amount needed for the full four years will be available when the student starts their freshman year.

1. Edit row one's "Deposit" series
1. Set the "Amount" to "Unknown"
2. Set the "# Periods" to 216. Fig. 4
• Investment stops after student is 18.0 years old
• Still assumes student born in first half of 2024
1. There are no changes for the "Withdrawal" series
• Before the calculation, your screen will look like this (Fig. 4):
• Less complex cash flow
• Withdrawal date starts after last investment
• Investment frequency is monthly while withdrawal frequency is semiannual
1. Calculate the unknown. The result is \$621.97. Fig. 5
• As an alternative invest \$621 every month for about 18 years at 5.0% and you'll be able to pay for college.

1. Click the [Schedule] button
• Monthly investments stop before withdrawals start