Saving vs. Borrowing for College

Written by Lisa Bleich

woman sitting at desk counting money as saves money for college. she was once conflicted over saving vs. borrowing money before.
Photo by Karolina Grabowska on

Are you thinking between saving vs. borrowing for college?

When our first daughter was born in 1994, we believed UGMAs (Uniform Gifts to Minors Act) were the best way to save for college. We eagerly set up an UGMA in her name, thinking that time and compounded interest would secure her college funds. When our second daughter was born in 1996, we did the same. However, the money did not accrue any interest and actually lost value over several years. Frustrated by our poor investment, we set up a 529 in our third daughter’s name when she was born in 1999 and transferred the money from the UGMAs into the 529.

How We Got Started in Saving for College

We established an automatic monthly investment into our accounts, faithfully believing that dollar cost averaging would benefit us in the long run. During the 2008 crash and the turbulent market that followed, we often had doubts. Like many other parents who lost money in their 529s, we wondered if it would have been better to forgo saving. Alternatively, we considered relying on potential financial aid or scholarships.

However, over the past few years, the market rebounded. With our second daughter now in her sophomore year of college, we feel grateful that we continued to save, even when the markets looked bleak.

Why It Makes Good Sense to Save for College Now

In Ron Leiber’s, October 23, 2015 NY Times article, Why It Makes Good Sense to Save for College Now, he explains clearly the benefits of saving vs. borrowing for college.  He also outlines the different types of aid.

My colleague, Lora Block, also brought to our attention an interesting tool that can help families with younger children. This is for parents grappling with the same decisions compare the cost of saving today vs. borrowing tomorrow.

She writes: “Below is a link to a rough and ready calculator to help families see the difference between saving (e.g. a 529 plan) vs. the cost of borrowing.”

Managing Expectations When Saving vs. Borrowing for College

You need to put in your own assumptions about how fast you imagine college costs will rise. This is compared to what you think the cost of college will be. The default on the calculator that a 529 plan might earn 6% is very unrealistic. This is because 529 plans usually earn much less, so she recommends changing it so something more conservative. But even so, this is a good exercise. Lora provides the following examples:

For a child who is 10 years old now: Based on a current cost of college of $25,000, a college inflation rate of 4% and an assumed investment return in your 529 plan of 3%; paying for the entire four-year cost of college would require monthly contributions to your 529 plan of $970. Your total contributions would be $128,022.

Calculations of a Fully Borrowed College Fund

If you were to instead borrow the full cost of college, your monthly loan payments would be $1,650. This is assuming a loan interest rate of 6.5%. This is the Parent PLUS loan rate now– which can rise to 9.5% maximum, and a 10 year repayment period. Your total loan repayments will be $197,968.

Lora also cautions that this calculator does not include how saving for college can lower a family’s eligibility for financial aid. In this scenario, the family’s savings of $128,000 would be counted as a parent’s asset. Then, this will be assessed at up to 5.64% of the value. Therefore, the student would be eligible for $18,000 less in aid over the 4 years. This was derived by calculating 5.6% on a declining balance of the 529 each year if 1/4 of the total is used each year to pay for college.

In comparison, this scenario above shows an additional cost of $70,000 in loan payments. This if the parents borrow the full amount vs. saving the money.

So if you have the ability to save for college when your kids are young, it can definitely pay off from a financial perspective.

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