By Nick Clay
To review previous blog posts, what is a 529 Plan? Savingforcollege.com says, “A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.”
In February, Myra posted an article on the cost of education and different saving vehicles to help pay for the rising costs of sending your child (or grandchild) to college. In that post, you will notice that in 2012-2013 the average cost at a public four year institution for room, board, tuition and fees is $17,860 (private four year college is $39,518). If you have a young child in the family, can you imagine what it will cost to send him/her to college in 5, 10 or 15 years from now?
We’ve discussed how compounding returns and saving early can benefit your efforts of saving money for goals, but does saving truly benefit you in the long run, or would it be better to not save (keep extra money in your pocket) and simply borrow the money for college down the road?
Consider these two things:
- More and more people over the years are turning to loans to help pay for college. 34% of families paying for college took out student loans in 2010, up from 25% in 2009.1
- Two-thirds of college seniors in 2010 graduated with student-loan debt. The average amount was $25,250.2
Student-loan debt for a new graduate can be a serious financial burden. Common sense says that the more you save for college, the less you have to borrow and subsequently pay back (plus interest). So let’s look at an example and see how much it truly makes sense.
Scenario 1 – Saving money for 15 years, earning 6%/year and trying to accumulate $50,000 for future education expenses:
Scenario 2 – Same variable except you are borrowing $50,000 and paying it back over the same 15 year time period at the same 6% interest rate:
Outcome – If you were to borrow the same amount of money you could have saved, then it would cost you $43,725 more!
Keep in mind that this is for illustrative purposes and not intended to predict an actual investment, but you can see how saving is so much more important in the long run. Your goal does not have to be $50,000, it could be $10,000 or $25,000, but as the saying goes… “Every little bit helps.”
1 Sallie Mae, How America Pays for College (2011)
2 The Project on Student Debt, Student Debt and the Class of 2010 (2011)