Understanding College Funds: Saving Strategies for Parents

College Funds for Your Children Midge Reschke, Eric Peiffer University of Utah Math 1030 13 April 2023

Introduction Whether we are paying for our own college, or your parents are, the major expense of college that include tuition, housing, food should be something that parents and college attendees should have a strong understanding of. The topic of our project, College Funds for Your Children, has benefits for us both now and in our future. It ’s immediate benefits are primarily favored to those who pay their own college expenses currently, as it will allow to have a better understanding of mapping out a savings plan and what tools you can use to do this. But this will also be a insightful tool for parents who have kids that will attend college. If your parents are covering to the cost of your college expenses or planning to, this paper will help you have a better scope of the time, effort and financing that goes into paying a college education. . Second, the benefit that is in the name is figuring out a college fund for your children. This may seem like an issue that is far in our future, but financing a singular person’s college tuition is a very substantial financial investment, and financing multiple is even tougher. It is best that we are aware of the enormity of these expenses, the tools we can uses to save money and how the timing & preparation we approach these expenses with can be advantageous. We will use what we have learned about compound interest, investment plans, evaluating financial decisions, inflation calculations and planning for future expenses to develop a strong understanding of how we can best finance college tuitions. For us to achieve this goal we are going to start by researching colleges for two children to attend. After finding the college that each child will attend, we will estimate the cost per year for each child, taking into account inflation and so forth. Once we figure out the cost per year, we will use that to help us develop our savings plan for our children. We are going to research different savings plans to figure out which one is the best option for these two children. After

choosing a plan we will calculate how much we need in deposit in each savings account per month in order to have the total cost of expenses saved for each year of attended. All in all, this project is going to help us understand, one, how expensive college is, and two how important it is to start saving early on so that when the time comes for you or your child to go to college, it is not a financial burden. Cost of Tuition As mentioned in the instructions, putting a child through college is a huge expense. Researching colleges and different prices, we found this to be very true. Child 1 is going to go to attend Harvard University in 14 years. The current cost for tuition, housing and meal plans is $79,019. Taking into account an inflation rate of 3.5% yearly, we calculated what the price of tuition would be per year. The calculations and results are shown below in the table with the calculations following. Child 2 is going to go the University of Utah in 15 years. The current cost of tuition and housing is $42,944. Again, taking into account the inflation rate of 3.5% yearly, we calculated what the price of tuition would be per year. The results are also shown below.

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Savings Plan For this have explored two of the most common and used saving plans nationwide. Both are basic savings plans that do not require and previous history or status with each bank. The first savings account we explored was the Wells Fargo Waays2Save account. The second being Capital One ’ s base level savings account. It should be noted that APR rates will change from across the country, for our study we used a local postal code. Meaning we assume these two kids are from the Salt Lake City Area.

Savings Account #1: Wells Fargo - Ways2Save Savings Account This account has an Annual Percentage Rate (APR) of 0.15%, this is one of the higher compounding rates available for a basic savings account. This account requires the user to make a initial deposit of $25 minimum to open the account. As shown later, the first monthly deposit of each savings account would cover this fee. Owners of this account also must watch out for the $5 monthly service fee that is charged if their balance is below $300. However like the initial deposit, this regulation of the account will not affect us or our calculations. Savings Account #2: Bank of America - Standard Savings Account Capital One provides owners of these accounts with an APR of 0.01%, a typically lower rate. However, they provide much better rates for their customers who already have a history and established status with them. There will be monthly service fees of 8$ if the account holder is younger than eighteen years old or maintains a balance of $500 and higher. In summary the best savings plans for these parents is Wells Fargo’s Ways2Save savings account. After comparing both accounts, the Wells Fargo is a much more financially progressive route. The Annual Percentage of this account is vastly superior to the provided option Capital One offers. Users of this account have a much higher annual percentage yield. Meaning they will gain more interest on their invested money, allowing them to have smaller monthly deposits.

The rates provided for this account are unmatched and will allow the family to have a smaller initial investment than they would with Capital One’s saving account. Savings Accounts The first column of this graph, labe led “Year” is designated to what year of college each kid will be attending and what year of college expenses the parents will be paying. We have labeled savings account #1 as “Y1” and have also provided what year it will be and how long the parents have been saving to match that year’s expenses. Each savings account is labeled as Y#. The two middle columns we see what year of college each of the five years the of attendance and which school they will be attending. More notably in these columns we have the individual cost of tuition, housing and food for each year of college at both colleges. Lastly the final column represents is the sum of the units of the middle columns. This number represents the total amount of that year’s college expenses, which is how much money will need to be saved for that year’s college(s) expenses. The values in the column 4 will be used as our “A” values in the savings plan formula. This formula will be described later. Year Harvard University of Utah Total Y1 – 2037: 14yrs $ 127,907.62 $ 0 $ 127,907.62 Y2- 2038: 15yrs $ 132, 384. 39 $ 71, 946.18 $ 204,330.57 Y3 -2039: 16yrs $137,017.84 $ 74,464.30 $211,482.02 Y4 – 2040: 17yrs $141, 813.47 $ 77,070.55 $218,884.02 Y5- 2041: 18yrs $146, 776.94 $ 79,768.02 $226,544.96 Y6- 2042: 19yrs $ 82, 559.90 $82,559.90

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Calculations Now that we have calculated and added the expenses for each year the kids will attend college, we need to calculate the monthly payments that need to be made in order to reach the savings amount required for each year of college attendance. To do this we will use a slight variation of the Savings Plan Formula. In short, the original version of formula calculates multiple periodic payments over a period of time in savings account with an APR to calculate how much money one would be able to save with a specific savings plan. In this figure below you can see the Savings Plan formula, each unit and their meaning. However, as we have already acknowledged that we have calculated how much money we will need to save for all six years of college attendance and for each for each six separate

savings accounts. So, instead of solving for A, amount accumulated, as we usually would we will have to solve for the value of PMT. This will allow us to attain the cash amount of monthly deposits that are necessary to make for each savings account. To do this we will plug in the information and units we already have into the formula and isolate PMT to one side of the equation so we can solve for PMT. After we have completed these calculations, we had the value of each monthly payment that is required to pay that year's savings account to cover college expenses. Let it be noted that the APR rate provided on the Wells Fargo website for their standard savings account provided APR rate that compounded daily and not on a monthly rate. This caused are PMT calculations to be for daily deposits instead of the monthly deposits required for to pay each account. To account for this, we multiplied our PMT values by 30, the average amount of days in a month. This gave us our PMT in measurements of monthly deposits instead of daily deposits. In the figure below we have calculated the PMT required to reach the mandatory amount of saving required to attend college(s).

After doing extensive research into many different savings plans, this plan is not only feasible, but the best option we could find. This is due to the fact that Wells Fargo has a higher APR than many other savings plans out there. The average amount per month is around $1,000 which would be feasible for most families. The saving plan is definitely worth it. For all of the saving plans, the interest is $27,649.57. The amount invested in each account and the interest to follow is shown calculated below.

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Conclusion Overall, college is expensive. It is not something that you can wait until last minute to take into consideration. It takes time and planning. What we’ve learned through this project is that if you create a savings plan and start saving early on, college can end up being less of a financial burden. While the around $1,000 a month might not seem like a good amount of money, it is shown that putting that much a month into a savings account will add up to cover your college tuition. This project has been a valuable experience for us in two ways. As stated in the intro, it helps us be more grateful for everything our parents do for us if they are paying for our college and it helps us start thinking about a saving plan for our kid. While even having kids may seem a far way aways, starting to save earlier will help you in the long run. All in all, this project was

very valuable for many reasons but most of all because it helped us use what we have learned in this class to come up with a plan for a situation, paying for our children's tuition that many of us will be facing within the next couple years.

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Works Cited Bank of America Advantage Savings . (2023). Bank of America. Retrieved April 12, 2023, from https://www.bankofamerica.com/deposits/savings/savings-accounts/ Cost of Attendance . (2023). University Office of Scholarships & Financial Aid. Retrieved April 12, 2023, from https://financialaid.utah.edu/tuition-and-fees/cost-of-attendance.php President and Fellows of Harvard College. (2023). Tuition & Costs . Harvard Graduate School of Education. Retrieved April 12, 2023, from https://www.gse.harvard.edu/financialaid/tuition Savings Accounts and CD (Time Account) Rates . (2023). Wells Fargo. Retrieved April 12, 2023, from https://www.wellsfargo.com/savings-cds/rates/

College Funds for Your Children - Group 2-2

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