By Jamie Canup
October 9, 2018
Sometimes, when you read about where college or other postsecondary program costs may be in five, 10 or 20 years, it gets overwhelming. How will I ever save enough to pay for all those higher education expenses?! You may feel overwhelmed, and it sometimes seems easier to postpone savings for those expenses. You’re only fooling yourself if you do. Don’t let the fact that you may not be able to save as much as you’d like stop you from beginning and sticking with a savings plan.
The good news is that you don’t necessarily have to save enough to pay for 100 percent of your loved one’s expected higher education costs. Thankfully, there are federal, state and private sources of financial aid to help pay for some of these expenses. In addition, many institutions provide some amount of “discounting” on their tuition in the form of scholarships or other programs. However, don’t be complacent, some savings will be necessary to help cover those higher education expenses.
The majority of financial aid is in the form of loans. When you increase your savings—starting now—you reduce the amount of loans that inevitably will be required to help cover those higher education expenses in the future. In addition, if you start saving now, your investment will grow over time, thereby reducing the amount of debt you’ll need to take on. Moreover, the value of your college savings is equal to more than just the debt you avoid in the future because that debt comes at a cost, called interest. The combination of growth that can occur when you start saving now and the total amount (principal plus interest) you won’t be paying back later because you saved is a powerful one-two punch. That’s meaningful.
But that’s not the only value of reducing the amount of your and your loved one’s future college debt. Starting a savings plan now not only reduces the amount of debt you and your child will incur in the future, it also provides other benefits that help your child or grandchild face their future on a firmer foundation. A 2016 study by GoodCall, a data-driven finance website, found that the average student loan debt adds five years to the time a graduate is able to save for a down payment on a home. The study also found that a graduate with higher student loan debt is more likely to save less for retirement than a graduate with no student loan debt or a lower amount of student loan debt. So, you see, the power of saving now for those future higher education expenses is significant.
While you may not be able to save everything needed to cover those future education expenses, the savings you build over time will reduce the amount you or your loved one will have to borrow in the future. That results in paying back less over time AND gives your child or grandchild a leg up for their future.
So a little does go a long way! Why not start or add to a 529 plan account now?
About the author:
Jamie Canup is Chair of the Tax Practice at the law firm of Hirschler Fleischer based in Richmond, Virginia. He is also an active member of CSPN (and a former Chair of the Corporate Affiliates Advisory Board of CSPN), a frequent speaker at conferences and webinars on issues concerning tax-favored education provisions of the Internal Revenue Code, and he has been quoted in The New York Times, USA Today, The Wall Street Journal and other publications on 529 Plans. He can be reached at email@example.com.