Savings needed for a child to pay for college later in life
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Suppose that a young couple just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, 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? Please show all calculations.
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Solution Summary
Calculations (both by hand and by Excel formulas) are given to find out the time value of money in determining how much savings are needed for a newborn child to invest and pay for an undergraduate college education later on in life.
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At age 18, tuition would have increased to $12500*1.04^18 = $25322.71. We also need to take into account years 19-21's tuition for the full four years, which are calculated similarly (see Excel spreadsheet). We find that the tuition for ...
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