If you’re not sure what kind of financial goals to set to fund your child’s college education, a college saving calculator, such as this one on the TIAA-CREF Web site, can help as you think about saving money for college.

Information You’ll Need before You Start

  • Cost of tuition for one year of college today: If you’re not sure where your child might go to school, simply pick a public four-year college in your state and check its Web site for its annual tuition.
  • Tuition inflation rate: This calculator sets a default rate of six percent. Depending on the school, the area of the country, and the current economy, this figure could be between two and eight percent.
  • Years to save before college: Assume your child will start college at eighteen, and subtract his or her current age to arrive at this number.
  • Initial savings: the amount of money you already have set aside for college
  • Contribution amount: If you have a dollar amount you’d like to contribute monthly, put it in here. You can change the amount to see how the totals change on the calculator.
  • Assumed rate of return: This calculator sets a default rate of six percent.

What the Calculator Will Tell You

  • What four years of college will cost by the time your child attends
  • How much money your savings plan will have earned by that time
  • Your savings shortfall
  • What you would need to do to make up the difference, either as a lump sum, additional monthly contributions, or additional yearly contributions

Keep in mind that most students do not pay full price for college (see “The Real Cost of College”).  Note: This exercise focuses on tuition only. College costs usually include room and board, books, and other costs.

Putting It All Together: Three Examples

1.  Aaron and Julie have a new daughter, Alicia. They want to open a 529 college savings plan for her with the hope that she will attend Big State University in eighteen years. They already have five hundred dollars to open up an account. They are not sure how much to invest monthly, but think that fifty dollars a month sounds reasonable. Let’s see:

  • Today’s tuition at Big State U: $9,000
  • Tuition inflation rate: 6 percent
  • Years to save before college: 18
  • Initial savings: $500
  • Monthly contributions: $50
  • Rate of return: 6 percent

According to the calculator, in eighteen years, four years at Big State University will cost $112,380, or about $25,689 per year. Aaron and Julie’s 529 Plan will have $20,567, not quite enough to cover one year’s tuition. If they set their monthly contributions at $100 per month, they will have $40,550, enough to cover all of Alicia’s first year of school and $14,800 of her second year. To fully fund Alicia’s college tuition, they would need to set aside $265 per month.

2.  Phil and LaDonna have a ten-year-old son, Ty. They haven't really thought much about college, but now that Ty is approaching middle school, they think they should invest something toward his college education. They plan to start with the thousand dollars they received as a federal tax refund, and then deposit one hundred fifty dollars a month in a 529 plan. Will that work? Here’s how the numbers work out:

  • Today’s tuition at Big State U: $9,000
  • Tuition inflation rate: 6 percent
  • Years to save before college: 8
  • Initial savings: $1,000
  • Monthly contributions: $150
  • Rate of return: 6 percent

According to the calculator, in eight years, four years at Big State University will cost $62,752, or $14,345 per year.  By investing one hundred fifty dollars a month, Phil and LaDonna will have saved $20,321, enough to pay for one full year and part of a second. If they were to invest $265 a month (what Aaron and Julie need to invest to fully fund their child’s education), they would have $35,609, enough to pay for about 2 1/2 years of college. To fully fund Ty’s college education, Phil and LaDonna will have to invest $455 per month.

3.  James and Elise have a fifteen-year-old daughter, Mandy, who just informed them that she wants to go to Big State University in three years. James and Elise have never really thought much about paying for college. Mandy is a smart girl, but they’re not sure how much she might get in scholarships.  They decide to start putting something away but aren’t sure how much good it will do. Here are the numbers:

  • Today’s tuition at Big State U: $9,000
  • Tuition inflation rate: 6 percent
  • Years to save before college: 3
  • Initial savings: $500
  • Monthly contributions: $200
  • Rate of return: 6 percent

According to the calculator, in three years, four years at Big State University will $46,892, or $12,044 per year. By investing $200 per month, James and Elise will be able to pay $8,482 towards Mandy’s first year of college. If they invest $455 per month (what Phil and LaDonna need to invest to fully fund their child’s education), they will have $19,007, enough to pay for all of Mandy’s first year and about two-thirds of her second year. To fully fund her education, they will need to invest a whopping $1,073 per month.

These examples illustrate the benefits of investing early for your child’s college education. But if you haven’t started saving yet, does that mean you shouldn’t? Should James and Elise even bother if all they can put aside is two hundred dollars a month? Absolutely. The $8,482 they save is $8,482 they won’t have to borrow and pay back later. Saving is always worthwhile.

You may wonder if saving now will cut your child’s financial aid later. A little for some families, but you’re still better off having money than not, just as you’re better off earning wages than not despite income taxes. Using today’s aid formula, a low- or middle-income family could lose up to five dollars in aid for every one hundred dollars extra they saved in any of the current college savings tools.