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Question
Hillary is trying to determine the cost of health care to college students, and parents' ability to cover those costs. She assumes that the cost of one year of health care for a college student is $1,000 today, that the average student is 18 when he or she enters college, that inflation in health care cost is rising at the rate of 10 percent per year, and that parents can save $100 per year to help cover their children's costs. All payments occur at the end of the relevant period, and the $100/year savings will stop the day the child enters college (hence 18 payments will be made). Savings can be invested at a simple rate of 6 percent, annual compounding. Hillary wants a health care plan which covers the fully inflated cost of health care for a student for 4 years, during years 19 through 22 (with payments made at the end of years 19 through 22). How much would the government have to set aside now (when a child is born), to supplement the average parent's share of a child's college health care cost? The lump sum the government sets aside will also be invested at 6 percent, annual compounding.
a. $1,076
b. $3,997.81
c. $5,674.23
d. $7,472.08
e. $8,554.84
Answer
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