Question

A common concern for young parents is how they will pay for their children's college educations. To address this, there are an increasing number of college savings plans, such as the so-called "529 plans," which are tax-deferred.

Suppose Jim and Edna established such a plan for their baby daughter Maura. If this account earns 9.8% compounded quarterly and if there goal is to have $200,000 by Maura's 18th birthday, how much would they need to deposit on Maura's first birthday to meet their savings goal?

If college costs grow with about 4% annual inflation, how much would they need to deposit on Maura's first birthday to save up for $200,000 plus inflation?

Answer 1

Maura's parents are depositing an amount on her first birthday and want and want it to be 200000 after adding the compound interest over time. The interest rate is 9.8% per annum and the amount is compounded quarterly. Hence the interest rate in 9.8/4 = 2.7% per quarter. The amount is compounded over a period of 17 years which is 17*4 = 68 quarters.

By compound interest formula, if x was the amount deposited initially we need .

Hence . Maura's parents must deposit $32,678 to have $200,000 by her 18th birthday.

If the inflation rate is 4% yearly. 200,000 after 17 years will be . Now they must deposit .