Can a 529 Plan Help Reduce Student Loan Debt?

When it comes to paying for post-high school education, the issue of college debt and student loans becomes an important topic for students and their families. While many people are concerned about what it will take to pay for college, the reality of college loan debt is often not dealt with until after graduation. But, for those thinking about the total cost of an education, potential future repayments need to be considered.

Save now to borrow less later

College debt doesn’t have to be an assumed burden for students. With the right strategy and realistic education savings goals, the negative impact of college student debt may be minimized, if not avoided. While there are many savvy tips and good habits you can use to help avoid the sting of college debt, the best way to reduce this debt is to save money now.

Saving money can take many forms, and you can use different financial tools. Any amount you save now reduces the amount of money you will need to borrow in the future. To get the most from your savings, make sure that the money saved is actively working to earn more. Although interest is earned with a traditional savings account, many families are maximizing their savings potential with a 529 education savings plan.

A 529 savings plan is a flexible, tax-advantaged account that uses money saved for an education and invests it to help maximize earning potential. Money in a 529 account works toward growing your savings and potentially reducing the impact of any student loans borrowed in the future. Even better, family and friends can contribute to a 529 account, and the money earned can be used for a wide range of qualified education expenses.

Loan-focused vs. savings-focused strategies

Using student loans as a primary means of paying for a college education is limiting and increases future student debt. This loan-focused strategy assumes no savings and has only one other potential source of funding — financial aid. Since financial aid provides just a small amount of relief relative to total education costs, most of the money needed will come from loans that will need to be repaid with interest.

With a savings-focused strategy that uses a 529 plan, a new stream of funding is introduced. This new funding has minimal impact on the amount of financial aid given, which reduces the need for student loans. If student loans are needed, the overall cost and time needed to repay may be reduced.

The potential benefits of saving now with a 529 plan

Saving for an education can be done at any time, but of course sooner is better when it comes to planning for college. When comparing the growth of $10,000 in savings for 18 years in a traditional savings account versus a 529 account, the savings in a 529 account does more work. Not only are the funds in a 529 being invested, but the earnings grow tax free. Interest earned on traditional savings accounts is subject to federal and state taxes.

Families planning for the future dreams of their children can make the most of their time and savings with a dedicated education savings plan. While the burden of college student loan debt is always a possibility, a smart savings plan may reduce its impact and set your children on a faster course to maximizing their own savings potential. Gain a better understanding of the total cost of education with our College Savings Planner and our ABCs of Educating Savings guide.