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Save for your child’s college tuition! Consider the following parameters: Your daughter is a three-year old...

Save for your child’s college tuition! Consider the following parameters: Your daughter is a three-year old She is going to college at age 18 You make $50,000 annually (the current median income in the U.S.). Your spouse also earns this amount. There is no other source of funding. (In other words, you have no additional help from family members, and there are no scholarships available in the future.) Ignore taxes for now. Estimate each input for the time value of money equation: present value, future value, rate, and number of periods. In order to make reasonable estimates, ask yourself the following questions: How much can you afford to invest today? How much will college cost in 18 years? Will you be saving for private or public? What rate of return will you use to make this calculation?

Expert Solution

To answer this I am considering treasury bonds as vehicle of investment (Risk free investment) and Non-profit private college as possible college to have any type of college education covered under investment planning.

Current cost of college education per year - $ 45,000 including boarding cost

Four year education to cost at present - 4 * 45,000 = $ 180,000

Expected cost of education in 15 years @ 2% inflation = 242,250 (rounded)

So, we require $ 242,250 in 15 years from now.

As given in the problem, total income including spouse is $ 100,000 per annum.

Current yield on treasury bonds for 15 years is 2.50 % p.a. (based on US treasury website data)

So, to save 242,250 in which fifteen years @ 2.50% p.a. we have to invest annually how much?

Future value = $ 242,250

Rate = 2.50% p.a.

Number of periods = 15

Annual payment =(FV * Rate)/((1+r)^n -1)

= (242,250*2.5%)/ ((1+0.025)^15 -1)

= 6056.25/(1.448 -1)

= $ 13,509.42 per annum

So, if $ 13,509.42 is invested every year in treasury bonds yielding 2.5% p.a. for 15 years we will end up with $ 242,250 sufficient for 4 years college education in a Non-profit private college.

I made necessary assumptions to answer the problem, feel free to comment for any alternate answer as per your assumptions.

jeff jeffy answered 2 years ago

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