Every parent wants their child to succeed. From finding the right school, the perfect group of friends, and even the best sports teams, parents constantly look for ways to guide their child into a solid future. College is usually a part of that plan too — but what about paying for it? As the years go by, tuition prices only go up. The way to prepare for the financial burden associated with college and its enormous cost is to start saving right away. Most parents understand they need to add a college fund into their savings plan; they’re not sure how. So let’s check out some options and discuss why it’s important.
Reasons to Add a College Fund to Your Savings Plan
You save money to buy a house, get a car, retire — why not save for college? One of the biggest benefits of saving and doing it early is that the account’s value will grow over time. If that doesn’t convince you, here are a few other reasons.
Avoid Student Debt
The latest student loan figures are staggering. Forbes reports that as of 2021, over 45 million borrowers owe up to $1.7 trillion in student loan debt. It’s the second-highest consumer debt category behind only mortgage loans. If you’re wondering why you should save for college — helping your kid avoid the average college graduate debt of $37,693 is a prime example.
In turn, instead of them paying off mounds of debt well into their 30s or 40s, they’ll have a leg up to start a college savings plan for their children.
Graduate College
One of the benefits of saving for college is that your child is more apt to graduate, according to a study published at Washington University in St. Louis. The reasons behind it might be twofold. First, an established saving sets a belief that college is not only possible but expected. From a young age, children are raised knowing that college is the next step in their education.
Next, a student that enrolls in school with zero savings is more likely to rely on financial aid or massive student loans. Sometimes the burden of these financial decisions becomes too much, and the student drops out instead of risking staggering debt.
Margaret Clancy, policy director at the Center for Social Development at the Brown School at Washington University, reiterated the importance of savings. “This research underscores the importance of policies and programs that help Americans of all income levels to save for college. The ultimate goal is to increase post-secondary education access and completion rates, particularly among lower-income students.”
Savings Has a Minimal Effect on Financial Aid
Contrary to popular belief, saving for college only slightly affects financial aid. Here’s why. Aid eligibility is based on a bracketed system on the Free Application for Federal Student Aid (FAFSA). Parents who sock away college savings will only see a reduction in their federal aid from 2.64% to 5.64%.
Consider a $10,000 distribution from a college savings plan. At most, aid eligibility is reduced by $564. The lowest amount is $264. The bottom line is that even though financial aid takes a minor hit with money set aside, that savings drastically reduces the number of student loans needed to help cover costs.
Students With Savings Are More Likely to Attend College
If you’re still wondering why you should save for college, consider this: In the Washington University in St. Louis study referenced above, data from 857 families were collected. 512 families had income below $50,000 and 345 with income above $50,000. The study found that families earning below $50,000 but with savings of $1 to $499 were four times more likely to attend college than their moderate to lower-income counterparts with no savings.
Savings Make College Less Expensive
Funneling away money for your child’s education, especially from an early age, means you’ll pay less for college. How does that work? If you set aside $100 monthly for 17 years with a 5% annual rate of return, you’ll end up with $32,386 in total. That’s $20,400 in contributions and $11,986 in earnings.
Contrastly, if you borrow the entire $32,386 as part of a Parents Plus loan, with an interest rate of 6% and an origination fee of 4%, the total repayment amount over 10 years is $43,146.
The bottom line is saving early, with a solid rate of return, which means you’ll pay less for college.
How to Add a College Fund to Your Savings Plan
The best college savings plans are those that allow the money you contribute to continue to grow. Like a 529 plan, investment plans will enable you to make already taxed contributions that accumulate additional earnings. When your child’s finally ready for college, the distributions from the plan aren’t usually taxed, as long as they’re for qualified educational expenses.
