College Fund Question

[mjwise]

We're setting a monthly 529 savings goal for our son to fully fund his education and would love to hear your thoughts on this plan.

Currently, every year costs about $30,500 and costs have grown by 5%. The future value formula for this is:

FV = PV * (1 + r/n)[sup]nt[/sup]

where:
FV = future value
PV = present value
r = interest rate
n = number of times interest applied per time period
t = number of time periods

For the cost of a Bachelor's degree:

FV = $30,500 * (1 + 0.05)[sup]18[/sup] = $73,402 for year 1,
FV = $30,500 * (1 + 0.05)[sup]19[/sup] = $... for year 2,
FV = $30,500 * (1 + 0.05)[sup]20[/sup] = $... for year 3,
FV = $30,500 * (1 + 0.05)[sup]21[/sup] = $... for year 4

So the total cost for 4 years is $316,371

[Your annual costs are different than $30,500? Just multiply your annual cost by 10.373 for a Nestegg estimate based on 5% inflation, or 7.122 for 3% inflation.]

Next, we use the formula for the future value of a series (an annuity) to determine the required monthly payment. This formula is:

PMT = FV / [((1 + r/n)[sup]nt[/sup] - 1) / (r/n)]

where:
PMT = payment amount per period
FV = future value
r = interest rate
n = number of times interest applied per time period
t = number of time periods

Substituting the required future value ($316,371) and an 8% annual return compounded monthly over 18 years:

PMT = $316,371 / [((1 + 0.08/12)[sup]12*18[/sup] - 1) / (0.08/12)] = $659

[Try it yourself: PMT = Nestegg x 0.002083]

So, our kid needs about $659 monthly in his 529 account, given these assumptions. This can vary depending on the actual rate of return and inflation rate.

See any mistakes or bad assumptions?

 

[mjwise]

There's an error in multiplying years funded by 4.

 

[roel330]

@mjwise You know there are online calculators right?

 

[mjwise]

@roel330 Yep.

 

[lhr]

@mjwise You’re gonna put 659$/month in one 529 account for your kid? Wow that’s way too much

 

[mjwise]

@lhr How much are you putting in?