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College savings plans offer an important tool for managing the cost of higher education.
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Saving in advance could offer a significant cost savings compared to taking loans during college.
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College Savings Calculators can help you assess your personal situation.
Before you know it, that special day will arrive — your child will be off to college. But are you prepared for the significant college expenses that may come your way?
With an education funding plan in place, you can help manage potentially high tuition bills. When you start early and save over time, instead of waiting until your child goes to college, you may be able to avoid relying on loans or taking from your cash flow in the future to make tuition payments.
A 529 college savings plan makes it easy to start saving now. You can contribute money at any time, such as birthdays and holidays, or set up automatic payments that go into the account on a regular basis. By the time your child enters college, the total cost could be significantly less if you start making monthly contributions to a 529 plan today instead of making monthly loan repayments later. Let’s take a look at an example of how much a family could potentially save.
How much will saving in a 529 plan help?
The Sullivans have a one-year-old daughter, Jane, who they want to send to college one day. Based on today’s total cost of college of $22,261 per year for an average public university, their four-year total when Jane attends college in 17 years will be $219,913.*
Paying with a 529:
Assuming an annual investment return of 6% if they open a 529 plan, paying the entire $219,913 will require monthly contributions to their 529 account of $517 over a period of 20 years. Total contributions would be $124,163 and the total amount earned in their account would be $95,750.
This chart shows the build-up in total value of the 529 plan account over time and the spend-down over four years of college.
The hypothetical rate of return is for illustration purposes only and is not meant to represent the past or future returns of any specific investment or investment strategy, or to imply guaranteed earnings. This illustration does not reflect sales charges or other expenses that may be required for some investments.
Paying with a loan:
If the Sullivans were to wait and borrow the full amount when Jane goes to college instead of saving in a 529 plan, their monthly loan payments (assuming a loan interest rate of 6% and a 10-year repayment period) would be $2,441. Their total loan repayments to pay the four-year college cost of $219,913 will be $292,979, including interest paid of $73,066.
This chart shows the pay-down of their loan balance.
Hypothetical example for illustrative purposes only; individual results may differ.
Conclusion
Based on these assumptions, the difference in total costs for the Sullivans would be significant:
As you can see, waiting until college without having a plan in place can come at a hefty price. To assess your own personal situation, try our College Savings Calculators.
Related reading: Parental income, not assets, affects college financial aid
*Source: 529 Savings vs. Loans Calculator. Based on the cost for the 2012-2013 school year and a college cost inflation rate of 5%.