By Steve Dombrower, CFA
Vice President, College Savings Plans
OppenheimerFunds, Inc., Program Manager for Numerous 529 Plans
March 7, 2013
In my January 4th posting titled “You Can Afford College”, I talked about how with a little knowledge, planning, and the right tools, paying for college can be within reach. Specifically, we explored how savings is only one of several sources of funding you will use when the time comes to send your loved one off to college. In this entry, we will discuss how saving today can potentially reduce your overall out of pocket college costs.
The name of the game is “Start Early and Save Often”. By doing so, parents can potentially limit the loans you or your child may need to take in order to complete your college funding package. I often hear from parents comments like “We can only afford $25 or $50 a month.how can that possibly help?” It absolutely can help! Remember, every dollar saved is a dollar less in loans which can significantly reduce your total out of pocket costs. Let’s take a closer look and compare two different strategies; a loan based strategy and a savings based strategy to fund a four year education worth $100,000.
The Loan Based Strategy
In this case, Mr. & Mrs. Murphy decided they wouldn’t be able to put a dent in what college was going to cost for their three year old son. To that end, they didn’t save. They received approximately twenty five percent of the cost in financial aid and financed the remaining $75,000 with loans. Based on the Sallie Mae Loan Calculator, that $75,000 loan will end up costing the Murphys a total of $117,599 including interest.
The Savings Based Strategy
Mr. & Mrs. Smith took the advice to start early and save often. When Susie was only three years old they opened a 529 Savings Plan with the goal of being able to fund forty percent of Susie’s education, or $40,000 by the time she turned 18. To pursue this goal, they opened a 529 Savings Plan with an automated investment program, investing $150 a month until Susie turned 18.2 Over that fifteen year period, the Smiths invested a total of $27,000, which at an assumed annual rate of return of 5% ended up being worth $40,000.3
For the remaining balance, we will assume they receive the same financial aid as the Murphys and will also take some loans. However, their loan need will only be $35,000, not the $75,000 that the Murphys needed to borrow.
So, if you add up the $27,000 the Smiths invested into their 529 College Savings account along with the $35,000 loan plus $19,880 in interest (based on the Sallie Mae Loan Calculator), the Smith’s out of pocket costs total only $81,880 as opposed to the Murphy’s $117,599. That’s a thirty percent savings in out of pocket costs for the Smiths.
I know some of you may be thinking that coming up with $150 a month may be tough! Maybe not. Consider giving up a fancy coffee drink at Starbucks every day and you could very well be on your way to finding that extra money every month. And even if you can’t find $150, it’s likely that with a little careful budgeting, you too can find some portion of it.
Remember, a dollar saved is a dollar less borrowed! If you start early and save often, college can likely be more affordable! Considering opening up a 529 college savings or prepaid tuition plan today!
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Steven D. Dombrower, CFA, is the Director of Marketing, Distribution, and Investments for the College Savings Group of OppenheimerFunds, Inc. OppenheimerFunds is the Program Manager and Distributor for several 529 plans including plans in New Mexico, Illinois, Texas, Nebraska, and the Private College 529 Plan. As of November 2012, OppenheimerFunds holds $7.2 billion in college savings for diploma-bound beneficiaries across the country. To learn more about the 529 plans managed by OppenheimerFunds, visit www.oppenheimerfunds.com or call toll-free at 800-858-9819.