THE MATHEMATICS OF A LONG TERM SAVINGS PLAN SAVING FOR COLLEGE:

Benefits and Projected Earnings Over 20 Years

Molly Ann Wabel
8/8/2014



1 | P a g e

The Mathematics of a Long Term Savings Plan
Saving for College:
Benefits and Projected Earnings Over 20 Years

As a college student and a parent, I worry about how my daughter is going to pay for her
college education. Im financing my way through college by taking out high interest student
loans that will probably take me the next 30 years to pay off. Thats not a burden I want for my
children. With the high cost of education, I want to be able to lend a hand with her college fund
because I dont want the sticker price to prevent attendance. When discussing the options for
saving long term, my husband and I wondered what amount of money we would have to put
away each month and what was the best way to do it. I decided to investigate the types of
financial products offered by our financial institution and compare the approximate earnings
yield after 20 years.
For the purposes of this project, Im going to calculate the yield per financial product,
compare the two and find the monthly deposit to achieve our goal of $50,000. My goal is to see
which type of savings account will gets closest to my goal of $50,000 for 4 years of college
education. For the long term savings account, we decided to research products provided at our
local financial institution and sought the advice from one of the loan & savings officers.
The Actual Cost of Attendance
Before exploring the types of investment products that are best suited for college savings,
I needed to identify the actual cost of a 4-year, in-state tuition in 20 years. With the information
2 | P a g e

available on the website www.collegecalc.org, I was able to calculate an estimated cost of
tuition. Within this figure, I will be including tuition, books/supplies and other fees. I will be
excluding any cost associated with housing, room & board and food. By excluding the costs for
housing/boarding, the price drops significantly. The website www.savingforcollege.org gave me
the inflation rate. The table below illustrates the future costs plus inflation:
College Cost Calculator
In-State Community/Year:
In-State Public/Year
$5,022 2 Years: $10,044
$8,457 2 Years: $16,914
College Cost Inflation Rate*: 6%
Number of Years Attending: 4 Years
Estimated Cost: $39,222.12 for 4 years of attendance

Total Tuition Cost: $10,044 + $16,914 = $37,002
Total Inflation Cost: $37,002 * .06 = $2,220.12
Total with Inflation: $37,002 + $2,220.12 = $39,222.12
To calculate, I used two years of Community College and two years of In-State Public
College because of the huge cost savings. By attending Community College for the first 2 years
(4 years of In-State Public College: $33,828), I calculated a $16,914 savings. By reducing costs
by $16,914, it allows me a better opportunity to assist with the tuition cost.
3 | P a g e

Comparing Long Term, Educational Savings Products
After speaking to a financial advisor, Ive decided to explore two types of long term,
incremental savings products that were recommended to me. I contacted my local Credit Union
to get information on the savings products they offer specifically for educational purposes. They
have a few options that are dedicated to educational savings. The first one is called the Coverdale
Education Savings Account. This is a pre-tax savings account as long as the money is intended
and used for educational purposes. This type of account has a locked in .25% interest rate. I was
advised once the account reaches $10,000 to move the balance to a Money Market account that
has a much higher interest rate of 1.15%. I want to see if moving the balance will really affect
the interested earned, thus the balance at the end of the term.
Coverdale Education Savings Plan

Im going to explore two scenarios with this information. First, I want to see how interest
affects the Coverdale account if I make consistent payments and leave the balance in the account
for the full 20 years. Then, I want to see how the interest balance affects the balance if I move to
the Money Market after the Coverdale account has reached the minimum $10,000 required. I
also want to see how many payments I will have to make to reach $50,000 in both accounts.
Using the stated goal of $50,000, Ill use the Savings Plan Formula for the Coverdale
account for the next 20 years:
$50,000 = PMT x [(1+.0025/12)
20*12
-1) = PMT x [(1.0002083)
240
-1] 0.051257213
.0025/12 .0002083 0.0002083

$50,000 = PMT x 246.0739966 $50,000 = PMT x 246.0739966
246.0739966 246.0739966

4 | P a g e

PMT: $203.19/Month Actual Deposits: $48,765.60 Interest Accrual: $1,234.40
How many payments? $50,000/$203.19 = 246 monthly payments which is about 20.5 years

What Did I Find?
Based on the information above, I would definitely move the balance of the account to
the Money Market account once the $10,000 minimum has been reached. The interest accrual is
very low and not at all what I expected to see from this type of financial product for long term
savings.

Rolled Over Money Market Account

In order to move the balance from the Coverdale Education Savings Account to the
Money Market account, I will need to satisfy the minimum balance of $10,000. Because the
balance has been accruing interest in another account, I will need to find out just how much
interest. I know I will be moving the money in 1/5 the time, so I will reduce the time in this
equation to 4 years. Ill use the same Saving Plan formula but this time I will only calculate
$10,000:
$10,000 = PMT x [(1+.0025/12)
4*12
-1) = PMT x [(1.0002083)
48
-1] 0.010047499
.0025/12 .0002083 0.0002083

$10,000 = PMT x 48.23571464 $10,000 = PMT x 48.23571464
48.23571464 48.23571464

Total Interest Accrued: $64 New Account Balance: $10,064

Now, I want to add the new balance to the account with the higher interest rate. I will calculate
the interest on this new balance for the remaining 16 years.
5 | P a g e

$50,064 = PMT x [(1+.0115/12)
16*12
-1) = PMT x [(1.000958333)
192
-1] 0.201909841
.0115/12 .000958333 .000958333

$50,064 = PMT x 210.6886029 $50,064 = PMT x 210.6886029
210.6886029 210.6886029

PMT: $237.62/Month Actual Deposits: $45,623.04 Interest Accrual: $4,376.96
How many payments? $50,064/$237.62 = 211 monthly payments which is about 17.6 years

What Did I Find?
Its interesting how a few decimal points worth of interest make a big difference! Over
the 20 year term, the higher yield saving account has earned thousands of dollars more in interest
earned. This is definitely the better way to go.
Comparing Results

We know the interest earned was significantly higher with the Money Market account but
exactly how much? We can find that out by comparing the interest earned from the 20 year
Coverdale Account to the interest earned with the rolled over Money Market account. We can
use the Absolute and Relative Difference equations:
Absolute Difference: $4,376.96 (interest from MM) - $1,234.40 (interest from CESA)
= $3,142.56
Relative Difference: $3,142.56/$1,234.40 = 255 %
The difference in interest earned over 20 years is $3,142.56 or 255%! Wow!
6 | P a g e

Popular Practice?
Armed with my new-found knowledge, I wondered how many parents participate in
planning and saving for their childrens future education. Is it commonplace to do so? If they do,
what types of programs do they participate in? I decided to take a small poll to find out. Over a
four day period, in a social media open forum for parents, I asked moms to answer two
questions: Do you participate in some type of savings and what type of product do you use. The
responses I received not only surprised me but we very positive. I didnt realize so many parents
had their eye on the future. The state sponsored savings programs were very popular with almost
half of those that answered.
Percentage of Parents Saving For College - Parental Poll
Election Number
Contributing
Percentage
Yes - State Sponsored 12 44%
Yes Investment Product 3 11%
Yes - Bank Account 4 15%
Yes - Other (Military) 1 4%
Not Currently 7 26%
Total: 27 100%
7 | P a g e


Conclusion
When it comes to any long term investment, even small changes in interest make a big
difference. If the interest is too low, the long term accumulate wont be enough to make your
money work for you. You need to really research your financial options, set clear goals and use
the right kind of equations to achieve your goals. Speaking to a financial advisor was hugely
helpful to me and I will surely be heeding their advice.
Parents Contributing To Long
Term Education Savings
Yes - State Sponsored Yes - Investment
Yes - Bank Account Yes - Other (Military)
Not Currently
8 | P a g e

Works Cited
Anderson, Thomas M. June 2010. http://www.kiplinger.com/article/college/. 26 July 2014.
W., Skyler. Loan & Savings Officer, AFCU Molly Wabel. 25 July 2014.
www.collegecalc.org. 2012. 23 July 2014.
www.savingforcollege.org. n.d. 21 July 2014.
www.uesp.org. n.d. 21 July 2014.