1. You have a 3-year old child, who appears to be brilliant. You think she will clearly get a scholarship to Cal Tech when she graduates high school 12 years from now, where she will get a BA in theoretical astrophysics and stochastic calculus. But, just in case, you decide to save for her education immediately. You expect that she will get some student loans, enough to pay 70% of her tuition, which is currently $63,500 per year, but you expect tuition will increase at 5% annually. You plan on buying zero coupon bonds (YTM = inflation rate + 1.25%). If inflation stays steady at 2.5%, how much will you need to save to finance 50% of her tuition for 4 years?
2. You currently earn $40,000 annually, you assume that your salary will rise annually at 4%, and you are able and willing to save up to 14% of your annual pre-tax income for your child’s education. Is there a shortfall? If so, how much?
a. No, the FV of the savings are roughly the same as the tuition.
b. No, and the FV is more than enough, you can reduce savings to 10% of pre-tax salary.
c. Yes, at least 17% of pre-tax salary needs to be saved.
d. What’s the point? Her student loans will be too much anyway.