Strategies for Education Planning

Question 1

Steps to education funding time value of money

Answer 1

1. inflate college amount in today’s dollars by education inflation rate
2. solve for the PV of annuity due
3. calculate how much the client needs to save on an annual basis

Question 2

• two children ages 7 and 4
• want to start saving for their children’s education
• each child will have 5 years of college starting at age 18
• assumed current college costs $25k per year in today’s dollars
• education expenses expected to increase by 6% per year
• client assumes they will earn an annual return of 8%
• general inflation is 3%

how much must the client deposit at the end of each year to save for their children’s educational needs until the oldest goes to school? Assume that educational expenses are withdrawn at the beginning of each year and that education savings contributions will be made until the oldest child attains age 18?

Answer 2

first step identify the variables

current cost = $25k
education inflation = 6%
number of years in college = 5
number of years until first child enters college = 11
number of years education savings contribution will be made = 11
(how many years before college, how many years after college)
investment return 8%
are the contributions made at the beginning or end of year = end

second step use cash flow keys

cf 0 = 0
cf 1 = 0 with 10 freq
cf 2 = 25000 with 3 freg
cf 3 = 50000 with 2 freq
cf 4 = 25000 with 3 freq

i = 1.08/1.06 - 1 = 1.8868

npv = 190788.8611

step 3
pv = 190788.8611
fv = 0
pmt = solve for = $26725
n = 11
i = 8%