By Lauren Shipley
Public relations and marketing manager, College Savings Plans of Maryland
October 6, 2014
I hear one frightening theme as I travel in October: “I have been meaning to start a 529 plan for a while.” I believe many families understand the need to save for college, but often misunderstand the true benefit of saving.
It may sound bewitching, but each family has the power to cut their child’s future college costs in half. The power lies in saving now versus borrowing later. To cover $25,000 in college costs, a family could put away $92 a month into a 529 plan for 15 years—a total investment of $17,000.
1. A family choosing to borrow the $25,000 instead would have to repay roughly $35,000 (or approximately $300 a month over the next ten years)
2. Their total debt would be double the amount spent by the family who saved. Ghoulish, right?!
Another way I present it to families is this: the current Federal Parent Plus Loan interest rate is 7.21%. In the most basic terms without accounting for compounding interest, you are paying 7.21% more for college when you take a Parent Plus Loan. How about you get started late with your savings and don’t have any earnings? You are still paying the sticker price; that is better than 7.21% more. But, what if you save early and systematically and have earnings in your account? It is like getting college tuition at a discount without any tricks or treats.
Let’s face it; it is frightening how student loans saddle children with a huge financial burden just as they are starting out on their own. A little early planning can save families a zombie apocalypse down the road.
Saving isn’t just good for your children’s future—it can be good for your future, too. Money saved in borrowing costs can be put towards other investments such as retirement. Just think how spellbinding it would be to potentially have $17,000 extra in your cauldron!
1: Assuming a return rate of 6% and an annualized plan fee of 0.85%
2: Assuming a 6.8% loan rate
About the Author:
Lauren Shipley is the public relations & marketing manager of the College Savings Plans of Maryland, which offers both a 529 prepaid tuition program and a directly-sold 529 savings plan. Together, the plans have more than 236,000 beneficiaries with investments of more than $4.8 billion as of June 30, 2014. Shipley currently serves on the Communications Committee of the College Savings Plans Network.