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

PART 1

Let be the base amount that is to be deposited on Maura's First Birthday.

Then,

where,
r = the annual interest rate (decimal) = 0.098
n = the number of times that interest is compounded per year = 4
t = the number of years the money is compounded = 18

Required value of x = 35008.11 $

PART 2

The net amount after 18 years of inflation is,

If P be the principal amount, then,

Required value of P is 70920.01$