Financial Planning and College Savings Recommendations: Let's Set Things Straight

Abstract

Continuing increases in the cost of higher education, along with an ever-changing financial aid environment, suggest that financial planning is more important than ever for those seeking to send a child to college. One commonly used aid to the financial planner is the "college savings table", which is ubiquitous in both the popular press, as well as the literature geared toward financial planners. Although they are intended to simplify the planning process, some of these tables may lead to misallocation of family resources. The tables generally purport to show how much money parents must save monthly to fund four years of college at a specified future date. We demonstrate that these tables often employ flawed methodology. Upon correction (and given reasonable assumptions abut investor behavior, growth rates in tuition costs, and investment yields), the monthly savings necessary to fund a given level of college expenses can be substantially less than those reported. Additionally, published tables typically provide the planner with a limited range of investment yield assumptions, suggesting a narrow range of portfolio possibilities. We provide a series of tables which allow the financial planner to estimate required savings for various combinations of investment yields and tuition growth rates.

JEL Classification: I22