College costs are rising and you are saving for the college education of your two children. One child will enter college in 5 years, while the other child will enter college in 7 years. College costs are currently $10,000 per year and are expected to grow at a rate of 5% per year. You assume that each child will be in college for four years. How much do you need to save each year over the next five years?
You currently have $50,000 in your educational fun. Your plan is to contribute a fixed amount to the fund over each of the next 5 years. You want to first calculate how much you would have to save by the fifth year so that if that amount was invested it would have the exact dollar amounts needed for each year the children attended college. Your first contribution will come at the end of this year, and your final contribution will come at the date when you make the first tuition payment for your oldest child. You expect to invest your contributions into various investments, which are expected to earn 8% per year.
1) How much will college costs be per year when the children are ready for attend?
2) How much will you have to save by the 5th year which if invested at 8% will meet the expected college costs per year?
3) How much should you contribute each year over the next five years in order to meet the expected cost of your children's education that you have calculated in question 2?