The impact of student loans

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When planning for college, the option of student loans often comes up, especially if anyone involved has a "pull yourself up by your own bootstraps" mentality. But before signing on the dotted line, it's important to look at the impact student loans can have on a family's financial future.

Student loan debt can affect retirement savings

If families don't have a college savings plan, it can have a domino effect. Parents may have to reduce retirement savings or work longer. If children take out a loan, it can impact their ability to buy a home and send their own children to college.

A college education today costs on average $21,340 per year for an in-state, four-year public school,1 which totals more than $85,000 for four years. Below, we look at three different scenarios for paying that $85,000 bill:

Would you rather pay interest or earn interest?

Scenarios Planning a debt-free education Saving half and financing the rest Financing tuition with student loans
  Planning a debt-free education Saving half and financing the rest Financing tuition with student loans

Parents and Grandparents pooled their resources to invest $220 a month for 18 years to pay the college bill in full.

Many families take a combined approach. This family invested $110 a month to cover half of the college bill. The student financed 42,680 repaying $441 a month for 10 years.

An independent student financed her $85,000 education 100% with student loans. She will repay $883 monthly for 10 years.

  Debt: $0 Debt: $45,049 Debt: $90,098
Monthly investment: $220 $110
Years: 18 18
Growth rate: 6% 6%
Total invested: $47,600 $23,800
Future value: $85,000 $42,680
Loan amount: $42,680 $85,000
Interest:2 4.45% 4.45%
Years of repayment:3 10 10
Monthly payment: $441 $883
Loan total: $52,956 $105,912
Out-of-pocket4: $47,600 $76,756 $105,912

Source: Invesco; This hypothetical example and estimate of an 6% average annual total return is for illustrative purposes only and is not intended to represent the actual performance of any particular investment product or real investor. Your actual return isn't likely to be constant from year to year, and there is no guarantee that a specific rate or return will be achieved.

Borrowing could cost 123% more than saving

By borrowing $85,000 to pay for college, the independent student will pay $105,912. That's 58,312 (or 123%) more than the family that saved and invested. It's not hard to understand why almost one-third of millennials (18- to 34-year-olds) are still living with a parent!

What could borrowing cost you?

Use our College Savings Planner to help develop a college savings plan and estimate the benefits of saving now with a 529 plan. Click the Saving vs. Borrowing link to see just how much you would have to pay if you borrowed the money instead of saving.

Additional materials/information

1 Source: Ascensus/College Savings College Savings Planner. Sept. 30, 2017.

2 Source:, “Interest Rates for Direct Loans First Disbursed on or After July 1, 2017” states 4.25% is the interest rate for Direct Subsidized and Direct Unsubsidized loans for undergraduate school. The information is as of Oct. 10, 2017, interest rates for federal student loans are determined by federal law and can change.

3, Overview of Direct Loan and FFEL Program Repayment Plans section states the standard repayment plan is 10 years.

4 Out-of-pocket = total invested + loan total