The proactive choice: Why saving for college beats borrowing

Parent helping child for making a smart choice
Key takeaways
Saving might be the smart choice

Saving for college early may help parents reduce or eliminate interest costs on borrowed money and leverage the tax-free growth and potential compounding benefits of 529 plans.

Look to a financial professional

With so many variables to consider, planning for education can be challenging. Financial professionals can guide you as you start your savings journey.

Borrowing brings uncertainty

Relying on future borrowing involves uncertainty, as credit markets can fluctuate and personal finances can be impacted by job loss, health issues, or other unforeseen events.

The proactive choice: Why saving for college beats borrowing

One of the primary potential benefits of saving for college rather than borrowing is the reduction in interest costs. Loans, whether they are private or federal, accumulate interest, which can significantly increase the total amount that will need to be repaid over time. By saving early, parents may accumulate funds through investment growth, thereby helping to reduce or eliminating the need to pay interest on borrowed money.

Investing in a college savings vehicle like a 529 plan allows your contributions to grow tax-free, provided that withdrawals are used for qualified educational expenses.1 These plans often offer various investment options and offer the key potential benefit of compound growth. The earlier you start saving, the more potential your money has to grow, leveraging the power of compounding to possibly increase your savings by the time your child is ready for college.

To illustrate the potential benefits of saving versus borrowing, let’s look at a hypothetical example with the Miller family, who faces a $50,000 shortfall in their education funding:

Facing monthly payments of $555.10, the Millers’ cumulative loan payments total is $66,612, reflecting $16,612 in interest payments over the 10-year period.

By consistently saving a relatively modest amount per month, the Millers can achieve their $50,000 goal with a $36,000 cumulative investment amount, approximately $30,000 less than they had to spend to borrow $50,000.

Thoughtful education planning can be a difficult process, but financial professionals can help you as you begin your savings journey. Some of the factors that you may want to consider to both determine and potentially achieve your goals include:

  • The age of the child today and the age at which they are expected to begin their first year of school.
  • How long the child is expected to attend school, and if post-undergraduate studies are anticipated.
  • The type of school a student is likely to attend. This could be a public or private university, a community college, a vocational school, a private high school, etc.
  • Whether the student will attend a school located in their state of residence or an out-of-state school.
  • The average cost of tuition, room, board, fees and expenses in today's dollars for the type of school a student plans to attend.
  • The expected annual increases to the cost of education (which has historically been higher than the inflation rate) for the type of school the student plans to attend.
  • The expected return on your savings.

While borrowing for college is sometimes necessary, it often ends up being more costly than a long-term savings plan due to interest payments, the absence of potential investment gains, and less financial flexibility. Relying on the ability to borrow in the future comes with some uncertainty. Credit markets can fluctuate, and personal financial situations can shift due to job loss, health issues, or other unforeseen events. By saving early, you can hedge against this uncertainty and sleep better at night.

Don’t miss the boat on 529 plans

529 Savings Plans allow parents and grandparents to contribute funds to an account designated for a beneficiary's future higher education expenses, independent of their income level. Most states offer their own 529 savings plans, you can select plans from other states without any restrictions, and many states offer tax deductions or credits for contributions. See 529 state tax benefits.

The funds in these accounts can be used for any accredited school eligible for federal financial aid, including two-year or four-year public and private colleges and universities, graduate schools, and professional schools. And, under the SECURE Act, 529 funds can be used for private K-12 tuition and vocational programs, including textbooks, fees, and equipment related to apprenticeship programs.

Saving for college is not just a financial decision but a strategic investment in a child's future, creating dividends that extend beyond the world of money. Talk to your financial professional about opening a CollegeBound 529 account or call 877-615-4116 to request an enrollment form today.


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    Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.

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