Paul Murray*

Paul Murray would soon graduate from business school with his MBA. He had accepted a fine job offer. Paul’s wife, Nancy, was an attorney with a local firm specializing in corporate law. Paul and Nancy were expecting their first child a few months after Paul’s graduation. With the experience of paying for their own graduate educations fresh in their minds, Paul and Nancy recognized that they would have to plan early to accumulate enough money to send their child through four years of college.

Paul wanted to accumulate a fund equal to four times the first year’s tuition, room, and board by the time his child entered college. Paul and Nancy assumed that these fees might increase, perhaps annually, through the four years of college. However, if they invested the funds appropriately, the investments would yield enough to cover the increase in fees through the four years of college.

Ideally, Paul and Nancy wanted their child to be able to choose among an array of public or private colleges with good academic reputations. A recent newspaper article had indicated that the average tuition, room, and board at private four-year institutions was about $15,000 per year. They felt that if their child were entering college this coming fall, $18,000 per year for tuition, room, and board would provide the range of choice they sought.

Questions:
1. In the recent past, college fees had been increasing at about 8 percent per year. Because this rate of increase exceeded the general inflation rate, Paul and Nancy felt it would decline to a level closer to measures of general inflation, such as the Consumer’s Price Index. Thus, they decided to assume that college fees would increase 6 percent per year. At this rate, how much will one year of college cost 18 years from this fall. In 18 yrs, present tuition of 18,000 per year, at an inflation rate of 6%, will be 51,378.

2. Assume the Murrays want to accumulate a fund equal to four times the first year’s tuition by the end of year 18. Assume further that they make a single payment into this fund at the end of each year, including the 18th year. How much would they have to contribute to this fund each year, assuming that their investments earn 6 percent per year?

3. How would their annual contributions differ if their investments earned 8 percent? 10 percent? 4 percent?

To have 4 yrs tuition saved in 18 yrs, or 205,512, the annual payment at the end of each year, for 18 yrs, must be:

At 6% - 6,650. At 8% - 5,488 At 10% - 4,507 At 4% - 8,014