Saving for College Education Expenses Is Better Than Borrowing
Every dollar counts when you're saving for education expenses. The more you can save ahead of time, the less you'll pay when you figure in interest payments from loans that cover education expenses.
For example, in 10 years the education expenses for four years of college at a public university are expected to total more than $110,000.1 A 10-year loan for $110,000 at 8% interest will cost almost $50,152 in interest. But if you accumulated $55,000 in college savings before your child entered college and the 10-year loan was reduced to $55,000 at 8%, the total amount of interest would be cut to less than $25,076.
College Cost (Four Years)
Amount Saved in Advance
Amount Borrowed (for 10 Years at 8%)
Interest on Amount Borrowed
Total Cost of College (Including Interest)
$110,000
$110,000
$0
$0
$110,000
$110,000
$55,000
$55,000
$25,076
$135,076
$110,000
$0
$110,000
$50,152
$160,152
Saving for College Will Not Hurt Your Chances for Financial Aid
Although parent and student assets are included in financial aid formulas, they often aren't as big a factor as most people think. In fact, the expected contribution to education expenses is based on only about 5.64% of parents' assets and 35% of students' assets.2
However, you should still keep that in mind when you determine your college savings method and account ownership. For example, a 529 college savings plan is considered to be a parent's asset (if the parent is the account holder), not the student's asset. A custodial account, on the other hand, is the student's asset and therefore factors more heavily into the college savings equation.
1Source:"2004-2005 College Costs: Keep Rising Prices in Perspective." Copyright 2005 by collegeboard.com, Inc. Reprinted with permission. All rights reserved.
www.collegeboard.com.
These projections are based on an average of expenses of public colleges or universities and a college cost inflation rate of 6%.
2Source: "Maximize Your Financial Aid Chances," CNNMoney (www.money.cnn.com), Oct. 18, 2005
