Question

You are saving for the college education of your two children. They are two years apart in age; one will begin college 14 years from today and the other will begin 16 years from today. You estimate your children’s college expenses to be $38,000 per year per child, payable at the beginning of each school year. The appropriate interest rate is 6.8 percent. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. Assume four years of college for each child. How much money must you deposit in an account each year to fund your children’s education?

Answer 1

Present value of college expenses need to be computed first. Here n = 4, I/Y = 6.8% and PMT = 38,000.

Thus PV = 129,297.32

I have solved the PV using the PV function in excel and the syntax: PV (6.8%, 4, 38000)

Next we find cost today of oldest child’s expenses. Here n = 13, I/Y = 6.8% and FV = 129,297.32. So again PV function will be used and syntax will be: PV(6.8%, 13,, 129297.32). The value will be $54,974.75

Next we find the cost today of second child’s expenses. Here n = 15, I/Y = 6.8% and FV = 129,297.32. So again PV function will be used and syntax will be: PV(6.8%, 15,, 129297.32). The value will be $48,197.08

Thus total cost today = $54,974.75 + $48,197.08 = $103,171.83

So money to be deposited in an account each year to fund your children’s education will be computed using the following: n = 14, I/Y = 6.8%, PV = $103,171.83. We need to compute PMT.

In excel put the following formula: PMT(6.8%, 14, 103171.83)

= $11,656.08

Thus you need to put $11,656.08 in an account each year to fund the education of your child.