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College Eduction Savings

John and Barbara Roberts are starting to save for their daughter's college education.

- Assume that today's date is September 1, 1998.

é College costs are currently $10,000 a year and are expected to increase at a rate equal to 6 percent per year for the foreseeable future. All college payments are due at the beginning of the year. (So for example, college will cost $10,600 for the year beginning September 1, 1999).

- Their daughter will enter college 15 years from now (September 1, 2013). She will be enrolled for four years. Therefore the Roberts will need to make four tuition payments. The first payment will be made on September 1, 2013, the final payment will be made on September 1, 2016. Notice that because of rising tuition costs, the tuition payments will increase each year.

- The Roberts would also like to give their daughter a lump-sum payment of $50,000 on September 1, 2017, in order to help with a down payment on a home, or to assist with graduate school tuition.

- The Roberts currently have $10,000 in their college account. They anticipate making 15 equal contributions to the account at the end of each of the next 15 years. (The first contribution would be made on September 1, 1999, the final contribution will be made on September 1, 2013).

- All current and future investments are assumed to earn an 8 percent return. (Ignore taxes.)

How much should the Roberts contribute each year in order to reach their goal?

Solution Preview

John and Barbara Roberts are starting to save for their daughter's college education.

é Assume that today's date is September 1, 1998.

é College costs are currently $10,000 a year and are expected to increase at a rate equal to 6 percent per year for the foreseeable future. All college payments are due at the beginning of the year. (So for example, college will cost $10,600 for the year beginning September 1, 1999).

é Their daughter will enter college 15 years from now (September 1, 2013). She will be enrolled for four years. Therefore the Roberts will need to make four tuition payments. The first payment will be made on September 1, 2013, the final payment will be made on September 1, 2016. Notice that because of rising ...

Solution Summary

This solution is comprised of a detailed explanation to answer how much should the Roberts contribute each year in order to reach their goal.

$2.19