By Michelle Winner, Public Relations and Marketing Program Manager, Maryland 529.
December 4, 2018
The New Year is just a few weeks away, which means it’s time to start thinking about your New Year’s resolutions. Spending less and saving more are some of the most popular resolutions, and if you have a loved one who has plans to attend college, now is a great time to consider opening a 529 plan.
A 529 plan is a tax-advantaged savings plan designed to encourage saving for the future education expenses of a beneficiary. One common phrase I often hear when I talk to parents about opening a 529 plan is, “I have been meaning to start a 529 plan for a while, but just haven’t done it yet.” While it seems that many families understand the need to save for college, they often misunderstand the true benefit of saving and investing now versus borrowing later.
According to Forbes.com, “student loan debt is now the second highest consumer debt category — behind only mortgage debt — and higher than both credit cards and auto loans.” More than 44 million borrowers collectively owe $1.5 trillion in student loan debt in the U.S alone. The average student in the Class of 2016 had $37,172 in student loan debt.
By saving for college now versus borrowing later, families have the power to potentially cut their children’s future college costs in half. For example, to cover $25,000 in college costs, a family could choose to invest $86 a month into a 529 plan for 15 years —a total investment of $15,500 with potential earnings of $9,500.1 Now if that same family chose to borrow the $25,000 instead, they would have to repay roughly $32,000 (or approximately $266 a month over the next ten years).2 Their total debt would be $32,000, nearly double the amount of out-of-pocket costs than if they had saved and invested that money in a 529 plan.
Another way to look at the benefits of saving now versus borrowing later is factoring in the 5.05 percent interest rate on current Federal Direct Undergraduate Loans. In the most basic terms without accounting for compounding interest, you are paying 5.05 percent more for college when you take a Federal Direct Undergraduate Loan versus investing in a 529 plan. Even if you start late with your college savings and don’t have any earnings, every dollar you save, is one less dollar you have to borrow and cost you $1.05 to pay back.
So don’t wait another year to start saving for college. Make a resolution to open that 529 plan and help alleviate the financial burden of student loan debt!
Michelle Winner is the Public Relations and Marketing Program Manager for Maryland 529.
1 Assuming a return rate of 6 percent. Returns in a college savings plan will vary and may be higher or lower than this example.
2 Assuming a 5.05 percent loan rate. The loan interest rate is based on a Federal Direct Undergraduate Loan disbursed in July 2018. Other loan arrangements could have different rates or terms.