Rosanne and Benjamin Carter married young and had two children by the time they
ID: 2793903 • Letter: R
Question
Rosanne and Benjamin Carter married young and had two children by the time they were 25. They had trouble making ends meet until Rosanne returned to work when Kaitlyn, their youngest, was in school full time. Rosanne currently earns $25,000 per year after taxes, and the couple estimates that they can allocate a substantial portion of her income to their children’s college fund. The Carters are now 31 years old, and their children are 10 and 7. They want to begin a savings program to help them pay for their children’s college education at an in-state public university, which they estimate is $24,000 currently. Assume that the education costs will increase at a rate of 4 percent per year.
a). What will annual costs be when each of the two children starts college at age 18? $____ when their 10-year-old starts college. $____ when their 7-year-old starts college.
b). If the Carters’ children can contribute one-fourth of the costs and they qualify for student loans and financial aid to cover another one-fourth of the costs, how much will the family need to save for each of the children? Estimate each separately.
They will need to have saved $____ by year 8 and $____ by year 11.
Explanation / Answer
Answer)
Annual college cost
The first child starts college in 8 years time (We are using formulea FV =PV*(1+R)^N)
Where, FV = future value
PV = present value
N = number of years
R is the rate
FV= 24000*(1.04)^8 =32854.657
The cost for 2nd child in 11 years time
FV = 24000*(1.04)^11 = 36946.897
Answer b) Cater's children cover half the cost of college by themselves and financial aid
Amount needed now for 1 st child in 8 years = 16422.83 (32845.657*50%)
Amount needed now for 2nd child in 11 years = 18473.45 (36946.897*50%)
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