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To save for college or pay student loans: that is the question

How will you pay for your baby’s college education?

When you are lovingly looking into your newborn baby’s eyes, you probably aren’t thinking, “How will I pay for college?” Unfortunately, that is exactly when you should be thinking about it and immediately begin saving. When your little bundle of joy is born, you have 18-19 years of savings and growth ahead of you but the average family doesn’t start saving until the child is 7 years old, that’s a lot of missed market growth. The sooner you start the more time is on your side.[i]

529 Plans

Taxed-advantaged college savings plans, called 529 plans that get their name from the tax code—Section 529 of the Internal Revenue Code, are up to 14 million plans in 2019 and 352 billion dollars in assets. “But while savings are increasing, so too are student debt loads and college costs. Americans now owe around 1.5 trillion in student debt, according to the Federal Reserve Bank of New York.”[ii] It’s great that college saving accounts are increasing but they are not even close to keeping up with the number of student loans being established.

How much does college cost?

A public four-year college costs an average today of $92,00 and in 18 years it is estimated that the same education will cost $185,000 with 4% inflation. So as a financial advisor, the question I ask my clients is, “Do you want to save $439 per month for 18 years at a hypothetical 7% growth rate or would you (or your children) rather pay $1420 a month for 15 years at a 4.53% loan rate on $185,000? The most important aspect of the equation is to be informed about the reality of college costs and to get started with something. Most 529 plans will allow you to start with $50 a month if you invest monthly on an auto draft plan. You can start at $50 and each year bump up the savings rate. Some parents I talk to don’t plan to fully fund college, they want their child to work and contribute to the cost as well. My advice is to get started so your college account can start taking advantage of the time value of money.

We still have a ways to go

“While we have reached record amounts of college savings, families are still not saving enough,” said Mark Kantrowitz, publisher and vice president of research at Kantrowitz has previously estimated fewer than 18% of children under age 18 have a 529 plan. One reason is a lack of awareness about the accounts, he said. [iii]

Still have questions?

Just like any financial goal there is usually more than one way to get there. I educate my clients on the different strategies that are available to them in college savings and find the path that makes the most sense for their family. If you have questions about college savings and do not want to contribute to the trillions of dollars in college debt, please do not hesitate to contact me.