Key Takeaways
- Education costs have historically increased at 3-5% annually, outpacing general inflation of 2-3%
- The Higher Education Price Index (HEPI) rose 3.6% in fiscal year 2025, exceeding the 2.2% pre-pandemic average
- Total cost of attendance includes tuition, fees, room, board, books, transportation, and personal expenses
- Use time value of money calculations with education-specific inflation rates to project future costs accurately
- Financial need is calculated as Cost of Attendance minus Student Aid Index (SAI)
Education Needs Analysis
Helping clients plan for education funding is one of the most important services a financial planner can provide. Education costs represent a significant financial goal that requires careful analysis, realistic projections, and strategic planning.
Understanding Education Cost Inflation
Education costs have historically outpaced general inflation, making accurate projections critical for effective planning.
Historical Education Inflation Rates
| Period | Average Annual Education Inflation | General CPI Inflation |
|---|---|---|
| 1978-2025 | 3.91% (long-term average) | 2.56% |
| 2010-2019 | 2.2% (HEPI average) | 1.8% |
| 2020-2024 | 3.4% (HEPI average) | 4.1% |
| FY 2025 | 3.6% (HEPI) | 2.7% |
Higher Education Price Index (HEPI) - This index specifically measures the prices colleges and universities pay for goods and services. For fiscal year 2025, HEPI rose 3.6%, exceeding both general inflation and pre-pandemic norms.
Planning Tip: While recent tuition inflation has been moderate (1.7% for the 12 months ending November 2025), planners should use conservative assumptions of 3-5% for long-term projections.
Current Education Costs (2025-2026)
| Institution Type | Tuition & Fees | Room & Board | Total CoA |
|---|---|---|---|
| Public 4-year (in-state) | $11,950 | ~$12,000 | ~$24,000 |
| Public 4-year (out-of-state) | $31,880 | ~$12,000 | ~$44,000 |
| Public 2-year (in-district) | $4,150 | N/A | ~$4,150 |
| Private 4-year nonprofit | $45,000 | ~$15,000 | ~$60,000 |
Components of Total Education Cost
When projecting education funding needs, include all cost categories:
Direct Educational Expenses
- Tuition - The primary cost; varies widely by institution type
- Fees - Activity, technology, lab, and facility fees
- Books and supplies - Average $1,200-1,500 per year
- Equipment - Computers, software, specialized tools
Living Expenses
- Room - On-campus housing or rent for off-campus
- Board - Meal plans or food costs
- Transportation - Travel to/from school, local transportation
- Personal expenses - Clothing, entertainment, phone
Total Cost of Attendance (COA)
The Cost of Attendance (COA) is the total estimated cost to attend a school for one academic year. Schools publish their COA, which serves as the maximum amount of financial aid a student can receive.
Projecting Future Education Costs
Time Value of Money Calculation
To project future education costs, use the future value formula with an appropriate inflation rate:
FV = PV x (1 + r)^n
Where: FV = Future cost, PV = Current cost, r = Annual inflation rate, n = Years until enrollment
Example: Projecting College Costs
Scenario: Current annual COA is $30,000. Child will start college in 10 years. Using 4% education inflation:
- Year 1 cost = $30,000 x (1.04)^10 = $44,407
- Year 2 cost = $30,000 x (1.04)^11 = $46,183
- Year 3 cost = $30,000 x (1.04)^12 = $48,030
- Year 4 cost = $30,000 x (1.04)^13 = $49,951
- Total 4-year projected cost = $188,571
Inflation Rate Selection Guidelines
| Planning Scenario | Recommended Rate | Rationale |
|---|---|---|
| Conservative projection | 5% | Assumes above-average increases |
| Moderate projection | 4% | Historical average |
| Recent trend-based | 3% | Reflects recent moderation |
| Elite private schools | 5-6% | Historically higher increases |
Financial Aid Considerations
Student Aid Index (SAI)
The Student Aid Index (SAI) replaced the Expected Family Contribution (EFC) starting with the 2024-2025 FAFSA. SAI determines financial need:
Financial Need = Cost of Attendance - Student Aid Index
Example: COA $50,000 - SAI $15,000 = Financial Need $35,000 (eligible for need-based aid up to this amount)
Planning Implications
- High SAI families: Should plan to fund most costs from savings, income, and loans
- Low SAI families: May receive significant grant aid; focus on maximizing aid eligibility
- SAI can be negative: Indicates highest level of need (for Pell Grant calculation)
CFP Exam Tip: Be prepared to calculate future costs using different inflation assumptions. The exam may provide specific rates to use or test your judgment in selecting appropriate rates.
A client has a child who will begin college in 12 years. Current annual cost of attendance at the target school is $40,000. Using a 4% education inflation rate, what is the projected cost for the FIRST year of college?
The Higher Education Price Index (HEPI) is used to measure:
A family has a Student Aid Index (SAI) of $25,000. The Cost of Attendance at their target school is $65,000. What is the student's financial need?