Youngs want to know the cost of college education for the two children so that they can approach Angel’s father about fully funding 529 Plans. The current cost of education is $35,000 per year in today’s dollars and the inflation rate is expected to be 5%. They expect the children to be in school for 6 years each, and while they don’t know, they expect the 529 Plan’s investment rate to be 8.5%.
Step 1: Calculate the inflation-adjusted, six-year cost of each child’s college education
N = i = FV = PMT = PV= |
Step 2: Calculate the present value of the lump-sum cost of each child’s six years of college.
For the 4 old |
For the 2 year old |
||
FV |
= |
FV |
= |
N |
= |
N |
= |
i |
= |
i |
= |
PMT |
= |
PMT |
= |
PV |
= |
PV |
= |
Step 3: Calculate the payment needed to each child’s 529 Plan
For the 4 old |
For the 2 year old |
||
PV |
= |
PV |
= |
N |
= |
N |
= |
i |
= |
i |
= |
FV |
= |
FV |
= |
PMT |
= |
PMT |
= |
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