Question

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child’s college education. The couple expects tuition, books and living expenses to cost $60,000 per year in their child’s first year, and to increase at 4% per year for four years. Assume college payments are made at the end the year (i.e. the freshman payment is made at the end of freshman year, etc.) and that the baby will start college on her 18th birthday.

a) Assuming college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education if the parents don’t want to save any more after her 18th birthday?

b) The couple plans to start saving at the end of the year (i.e. on the child’s first birthday) and to save through the 18th birthday. How much do they need to save every year to have enough money in 18 years to pay for college? (they will not save any more after the 18th birthday)

c) If the couple plans to make one savings deposit every TWO years, starting on the child’s second birthday and ending on her 18th birthday, how much will they need to save every year?

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Answer 1:
The first step is to calculate the fees that are due every year.
Fees due at end of year 1 = $60,000
Fees due at end of year 2 = $60,000 * (1 + 4%) = $62,400
Fees due at end of year 3 = $62,400 * (1 + 4%) = $64,896...

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