Question

Your clients would like to plan for their son’s college education. They would like their son, who was born this year, to attend a public university for 4 years beginning at age 18. Tuition is currently $23,500 per year and has increased at an annual rate of 5.25%. They expect to earn an after-tax rate of return of 7.5%. They want to be able to pay 100% of the costs. 9. What is the expected cost to your clients for

Answer 1

The question asks for the calculation of future college tuition costs based on current tuition rates, projected annual increases, and an investment return rate. The solution involves compounding the current tuition rate over time to estimate future costs and determining the annual savings needed to cover those costs, considering the investment return.

Step-by-step explanation:

The question involves calculating the expected cost of college tuition for a newborn child who will attend a public university at age 18, considering an annual tuition increase rate and an expected rate of return on savings. To solve this, we need to project the future cost of tuition based on its current rate, the annual increase, and then determine how much needs to be saved annually to cover that cost, factoring in the investment return rate.

The tuition is currently $23,500 and is expected to increase by 5.25% annually. To project the cost when the child turns 18, we use the formula for future value in a compound interest scenario:
Future Value = Present Value * (1 + rate of increase)number of years

Once we calculate the future cost of tuition, we would use the expected 7.5% rate of return on investment to calculate how much the clients need to save each year.