Question

Your clints, Jamal and Chyna Gwynn, would like you to determine if they are on track to meet the education funding objective of their son Jarius. Jarius is currently 13 years of age. Jamal and Chyna have high hope for Jarius's future education. Use the following date to determine whether or not Jamal and Chyna need to save more to fund Jarius's educational needs.

* Combined federal and state marginal tax bracket: 29 percent

* After-tax rate of return before college: 7.90 percent

* Before-tax rate of return of 529 plan: 9.75 percent

* College expense inflation rate: 4 percent

* Year Jarius begins college: Age eighteen

* Number of years in college: four years.

* Yearly cost of college today: $60,000

* After-tax assets earmarked for Jarius's education: $25,000

* 529 plan assets earmarked for Jarius's education: $60,000

* After-tax educational annual savings: $0

* Annual tax-advantage educational savings: $18,000

* Annual education savings growth rate: 3 percent

a. Approximately how much will Jamal and Chyna need (gross need) on Jarius's first day of college?

b. After accounting for the future value of assets and savings, how much additional (if any) do Jamal and Chyna need of Jarius's first day of college?

c. Based on your answer to the question above, how much must Jamal and Chyna save annually in the 529 plan to meet the educational saving goal?

d. If instead, Jamal and Chyna decide to save outside of a 529 plan or other tax-advantage plan, how much must they save each year?

Answer 1

	Cost of capital rate is	6.9225
a)	Requirement of fund on Jarius's first day of college
	College fees of four year	Expected College fee	Discount Factor @ 7.9%	Total Payment need to pay
	13	60,000.00		-
	14	62,400.00		-
	15	64,896.00		-
	16	67,491.84		-
	17	70,191.51		-
	18	72,999.17	1.0000	72,999.17
	19	75,919.14	0.9268	70,360.65
	20	78,955.91	0.8589	67,817.49
	21	82,114.14	0.7960	65,366.26
	Gross Amount needed at the time of admission in college	276,543.58
b)	Requirement of additional fund for admission in college
	Saving Value
	Year	Saving at the end of year	Return Factor @ 6.9225	Value at the time of admission
	1	18,000.00	1.3070	23,526.05
	2	18,540.00	1.2224	22,662.98
	3	19,096.20	1.1432	21,831.58
	4	19,669.09	1.0692	21,030.68
	5	20,259.16	1.0000	20,259.16
	Total value of saving	109,310.44
	Plan Asset value at the time of admission	(60000+25000)*(1.069225)^5	118,785.78
	Additonal Fund Requirement	276543.58-109310.44-118785.78	48,447.35
c)	Additional Investment requirement =	Fund requirement
			Cumulative factor of return
			48,447.35
			1.3070
			37,067.53
d)	If they think to save amount each year=	Fund requirement
			Sum of cumulative factor of return
			48,447.35
			5.7419
			8,437.58