Last week I came to the conclusion that the best reason for a teen to save for college education is to get her or him into the savings habit. If your teen is about the same age as my daughter (16), a high-school student probably won't save enough money in two years to pay for one class - especially on a limited budget. But, as my daughter reminds me, she could save enough to pay for books and the cost of transportation around campus possibly for two quarters or semesters.

Or, she could continue to save during her undergraduate years in case she wanted to pursue a graduate degree or if she needed a down payment on an apartment or car by the time she achieves her bachelor's degree. If you wonder whether a savings of $40 per month during her undergraduate years would knock her out of the running for college funds, there's no need. A quick look at the savings calculator at Motley Fool shows that she could accumulate $3,156.00 by the end of six years (two more years of high school and four years of college). I plugged in $0 for the amount already invested, 9% for the interest rate, $40 per month savings over 6 years, and kept the 25% tax rate, the 6.8% federal tax, and the 3% inflation rate to come to that figure.

Three-thousand dollars doesn't seem like much, and that amount really isn't much when it comes to procuring loans and monies for college tuition and expenses. That amount won't appreciably affect her chances to find funds for this effort. But, what if we began to save for her college education when she was born? Would the amount be that much different, and how would it affect her chances to grab some of those college loans and grants?

When I plugged in the figures at the Motley Fool's "What Will it Take to save for a College Education" calculator, I was surprised by the results. Although college might be eighteen years away for a newborn, I kept the $18,000 per year cost (which is a current average cost for one year of undergraduate tuition at a private institution). The reason I kept that cost is because this calculator has a built-in inflation rate for cost of living and for rising college costs that shows up when you click for the results. For this result, I input $0 for amount saved for four years of college eighteen years from now. The amount saved per month continues to be $40 with a 9% interest rate. I left the inflation rate at 3%, the federal tax rate at 25%, and the state tax rate at 6.8%.

By the time Baby Jane reaches college age, she'll need $116,573 for four years of college tuition at an inflation rate of 3%. This means that her college tuition jumped from $18,000 per year to $30,867 per year over eighteen years' time. So, Baby Jane's parents need to be more resourceful about their savings, because $40 per month just doesn't cut the icing on that cake. At $40 per month, Baby Jane will have access to $15,720 in eighteen years - an amount which mirrors the current price of an inexpensive automobile at today's prices. What to do?

Well, according to the calculator, Baby Jane's parents and others will need to 1) increase the monthly amount of investments to $277 per month; 2) increase the amount they invest now to $33,503, or; 3) look for an investment that will earn a rate of return of 30.86% yearly (good luck). But, there's no need to worry, because unless you can do #1 or #2, you won't save the amount Baby Jane will need for college in eighteen years and, if you did, you would throw her chances for school funding out the window along with her bath water. That $15,000+ is just enough to pay for one-half of one year's education, and that amount could lessen her chances for any "need" based funding.

Additionally, there's more good news and bad news that goes with this calculation. First the bad news - the Motley Fool calculator's rate of inflation for college tuition is off by 2+%, according to the College Board's 2005 Reports on College Pricing and Financial Aid. As you'll see below, this percentage rate isn't headed back down to zero:

"Average College Tuition and Fees 2005-06 versus 2004-05

• At four-year private nonprofit institutions, tuition and fees average $1,190 more than last year ($21,235 versus $20,045, a 5.9 percent increase). Total charges average $29,026 ($1,561 more than last year's $27,465, a 5.7 percent increase).
  
  
• At four-year public institutions, tuition and fees average $365 more than last year ($5,491 versus $5,126, a 7.1 percent increase). Total charges average $12,127 ($751 more than last year's $11,376, a 6.6 percent increase).
  
  
• At two-year public institutions, tuition and fees average $112 more than last year ($2,191 versus $2,079, a 5.4 percent increase)."

If you delved further into this site and read past press releases from the College Board, then you know that this increase is normal, so this news isn't all that hot.

Then there's good news - saving $40 per month for eighteen years isn't the only way to pay for Baby Jane's higher education. There are other means where taxes can be avoided and where other people can help to save for her education as well. Interested? Good - I'll share those ideas with you next week.

Until Then,
Linda Goin