Why Save for College?

Throughout American history, education has been the gateway to financial prosperity.  From GIs retuning after World War II to the children of families arriving at our shores over two centuries ago, education has been the American dream and the key to financial and social success.

Today in the face of a challenging economy, higher education is more important than ever.  It will prepare individuals to master the new technologies that will fuel the businesses of the future – energy, health care, and technology to name a few.

For most American families, education provides their children with the skills and strategic thinking they will need to become independent and productive adults.  As a country, it prepares us to be competitive and thrive through innovation.

The Benefits of a College Education:

Research shows that college degrees produce greater financial success: the College Board showed that people with college degrees exceed those with only high school degrees:

  • Higher education leads to higher earnings.  The typical full-time year-round worker with a four-year college degree earns over the course of a working life more than 60 percent more than the worker with only a high school diploma.
  • By age 33, the typical college graduate who enrolled at age 18 has earned enough to compensate for borrowing to pay the full tuition and fees at the average public four-year institution, including interest on student loans to cover these charges, and earnings forgone during college years.

Yet for many families the overall costs of a college education are daunting today and continue to rise. The average annual tuition costs of attending a 4-year public and a 4-year private college or university in 2009-2010 have increased over those of a year earlier.  Including room, board and expenses, the total costs for a 4-year public college are up 6.5 percent to $15,213; and for a 4-year private college up 4.4 percent to $35,636, according to the College Board.  Assuming such costs increase by 5% a year, the projected cost of college in 15 years will be more than $140,000 for a 4-year public college and more than $280,000 for a 4-year private college.

Why Savings is Key to College Financing:

So how can a family hope to prepare itself financially to meet these costs?

Saving is a critical piece in a family’s overall college financing strategy.  The College Savings Foundation’s annual State of College Savings survey of 800 parents showed that those parents who invested in 529s and those who habitually saved with automatic savings plans – each saved more than parents without them.

Every dollar saved in advance significantly reduces the cost of college if paid by debt.  And every dollar saved is one less that a family must get from unreliable and unpredictable sources such as the credit markets and the student loan market.

A look at the cost of borrowing demonstrates the case for saving: 

Assuming an even 7% interest and borrowing rates, the cost of borrowing versus saving is 7:1.  To accumulate $10,000 in 10 years at 7% interest, a family needs to save $58 per month. In contrast, to repay $10,000 over 10 years at 7%, that same family would need to pay $116 per month.  Over ten years the real cost of borrowing rather than saving is $116 - $58 = $58 x 12 months x 10 years, or $6,960.

In today’s tight credit market, the cost of heavy debt is great both in interest costs and in the constriction of access to capital.

For young people, debt levels are triple the national average. According to recent Federal Reserve statistics*, young people – whose head of household is under 35 -- are shouldering debt to asset levels of over 43%. 

*BusinessWeek, 3/9/09

Financial Benefits of a Degree

Higher education leads to higher earnings.  The typical full-time worker with a four-year college degree earns more than 60% more than the worker with only a high school diploma, over the course of a working life.

College Costs Are on the Rise

According to The College Board, the average annual costs of tuition, room and board for attending a 4-year public college or university in 2009-2010 are up 6.5% to $15,213.  The increase for a 4-year private college or university is 4.4% to $35,636.  Assuming such costs increase by 5% per year, the projected costs of college in 15 years will be more than $140,000 for a 4-year public college and more than $280,000 for a 4-year private college.

Source: College Board

Problems with Relying on Income or Loans

Previous generations have funded higher education through current income by cutting expenses or by taking out loans.  With tuition rising faster than inflation, it is no longer realistic for most families to cut expenses enough to cover college costs.  Not only do loans cost more over the long run, recent market conditions have resulted in a drastic reduction in the sources available for private education loans.

 

 

The examples are for illustrative purposes only and do not represent any particular type of loan.  The loans are based on an interest rate of 7%, and the calculations assume they are paid off in 10 years.  The calculations do not include inflation or any fees associated with the loan.  Your results will be different and will depend on the type of loan.

Benefits of Investing Early and Often

Investing early helps minimize future reliance on loans and regular investing over time can help lessen the impact of college costs.  The chart below illustrates how an initial investment followed by regular monthly investments can add up to significant savings over time.


What is a 529 Plan?

Congress created 529 Education Savings Plans in 1996 under Section 529 of the Internal Revenue Code.  They are state-sponsored, tax-advantaged vehicles for qualified post secondary education expenses, such as tuition, fees, books, required supplies, equipment and room and board.
There are two types of 529 Plans: savings plans, which allow families to save for expenses, and pre-paid tuition programs, which generally allow families to make advance tuition payments to cover future attendance at a designated in-state public college or university system.  Most states offer a 529 plan, and some states offer both savings and pre-paid plans.

Why invest in a 529 Plan?

Tax Benefits

  • Investments grow on a tax-deferred basis, and earnings are free of federal income tax.
  • Contributions are eligible for gift tax exclusion as long as certain conditions are met.
  • Generally, account owners can remove contributions and future earnings from their taxable estate.
  • Certain 529 plans offer some type of state tax deduction when residents invest in their own state’s plan.

Flexibility

    • There are currently no income limits.  Any U.S. resident or citizen, regardless of income, can open an account.
    • Account owners can withdraw money at anytime.
    • Funds may be used to pay qualified education expenses at any qualified educational institution in the U.S. (and some schools abroad), including any accredited public or private college or university, graduate school, two-year community or junior college and vocational and technical schools.
      • Eligible educational institutions include most U.S. schools and some schools located abroad. The institution must be eligible to participate in the U.S. Department of Education student aid programs. To determine if a school is an eligible education institution, search for its federal school code as www.fafsa.ed.gov.
    • Most plans offer low initial investments and a variety of investment options fitting various levels of risk and time horizons.

    Control

    • The account owner decides when and how money in the account is withdrawn.
    • Account owners can change beneficiaries and investment options, according to IRS guidelines.

    Start planning for your child’s future today.