What will it take to save for a college education?

Tuition and expenses in today's dollars

Years of college

Years until college

College savings to date

Amount you can save monthly

Your savings rate

Inflation rate

Your federal tax rate

Your state tax rate

"What will it take to save for a college education?" calculates different combinations to save a lump-sum amount to pay college tuition bill for a child or someone else. The calculator calculates the future cost of tuition based on the inflation rate that you designate.

You designate how much you currently have saved towards your goal, monthly savings amount, number of years you expect to save and savings interest rate.

Because you enter income tax rates, the calculator assumes you save with a taxable account. If you want to simulate saving with a tax-advantaged account, enter a zero in the fields for federal and state income tax rates.

Tax-advantaged accounts to save for college tuition and other expenses include Section 529 plans and Coverdell education savings accounts (formerly called education IRAs).

Lump-sum investments:A lump-sum investment is an investment that you make to open an investment or savings account. It is used to jump-start an investment or savings account. Possible sources of lump-sum investments include inheritances, lump-sum distributions from retirement plans and proceeds from a life insurance policy.

Section 529 plans:A Section 529 plan is a tax-advantaged account used to save for the college education of a child, grandchild or other dependent. Section 529 plans are run by state governments (and some private colleges) and include college savings plans and prepaid-tuition plans. Section 529 plans are named for the section of tax code that governs them. Investors contribute to an account that is managed by the investment board or treasury of the state in which the account is opened. Section 529 plans are offered in the form of prepaid tuition plans in 15 states and as college savings plans in 49 states. Tax laws for contributions and distributions vary from state to state. Both plan types allow for tax-deferred growth in the account. Funds taken from a Section 529 plan to pay for qualified higher education expenses are tax-exempt.

Inflation rate:The inflation rate is the yearly percentage change in inflation. Inflation is an increase in prices. The annual inflation rate in the U.S. has averaged about 3% in the last 10 years. For example, a basket of goods that costs $103 this year and only $100 last year experienced an annual inflation rate of 3%.

Taxable account:A taxable account is an account that does not receive the tax breaks that either a tax-exempt account or tax-deferred account are eligible to receive. (Both of these accounts are called tax-advantaged accounts. Tax-advantaged accounts are authorized by the IRS as investment vehicles to save for your retirement or the retirements of investors.)

Inflation:Inflation is a general increase in prices that you pay for goods and services, stated as a yearly rate. If the inflation rate is 4%, it means that prices increase at a yearly rate of 4%. For example, the same basket of goods and services that you can buy today at $1,000 will cost you $1,040 next year. Inflation cuts into your purchasing power even further for longer periods. For example, if you have $100,000 today and inflation grows at 4%, it would be worth $82,193 in five years. After 10 years, it would be worth $67,556. The major inflation indexes are updated monthly by the U.S. Department of Labor. The first index is the wholesale price index. It is also called the producer price index (PPI). PPI measures inflation that manufacturers and other producers face. The second index is the consumer price index (CPI). CPI measures inflation that consumers face for goods and services such as food, fuel, and housing. Monthly PPI and CPI figures are reported as a percentage change over the previous month. A series of 12 monthly reports are linked to determine a yearly inflation rate.

Savings interest rate:The savings interest rate is the yearly interest rate you earn on your savings. It is also used to calculate the opportunity cost of paying with cash. In contrast, the saving rate is the percentage of income you save.

Tax-advantaged account:A tax-advantaged account is an investment account with tax-deferred or tax-exempt features. The Internal Revenue Service authorizes the use of tax-advantaged accounts. These accounts are used to save for retirement or college and other educational expenses. Tax-advantaged accounts are tax-exempt until you take money out of the account. In some cases, distributions are tax-exempt provided the account holder meet certain conditions or the money is spent a certain way. In other cases, the entire amount of the distribution is taxable.

Coverdell education savings account (ESA):A Coverdell education savings account, formerly called an education IRA, is a tax-advantaged account that allows you to make after-tax contributions to pay for college tuition and qualified educational expenses. In 2012, you can contribute up to $2,000 per year to pay for educational expenses, including those for primary and secondary schools. Withdrawals are tax-exempt up to the amount of qualified expenses. The amount you can contribute to a Coverdell ESA is phased out at higher incomes. For single persons, the phase-out begins when modified adjusted gross income reaches $95,000. Allowable contributions phase out at $110,000. For married persons filing a joint return, the phase-out limits are exactly twice as much in 2012.