Question

Suppose that some parents begin saving for their child’s college education. They currently
have 15 years until their child starts college. Current tuition, room, and board costs $10000
per year. Assume these costs will grow at 7% per year for the next 20 years. Also assume it
will take four years to graduate.

(a) Calculate the costs for tuition, room, and board for these parents’ child 16, 17, 18, and
19 years from now.
(b) How much would these parents now need to set aside today to have the entire cost of
their child’s college education saved in 15 years? Assume an interest rate of 5%.
(c) How much would they need to save each year to have saved the entire cost of their
child’s college education in 15 years if the interest rate is 5%.

Answer 1

Answer)
a) The cost of education in 16th year is 10000(1.07)16 = $29522
The cost of education in 16th year is 10000(1.07)17 = $31588
The cost of education in 16th year is 10000(1.07)18 = $33800
The cost of education in 16th year is 10000(1.07)19 = $36165
b) A total of $131074 will be needed at the end of 15 years to have the complete finance for college education. The present value of this cost is 131074/1.0519 = $51870
c) An annual payment of $51870(A/P, 5%, 15) = $4995 is needed annually in the form of savings.