Paying for college: save now or borrow later

Paying for college is one of the most significant investments a family will face. Between tuition, books, other fees and living expenses, four years of public college in California will cost a family close to $100,000. Private colleges are almost twice that much. Unless your last name is Rockerfeller, you probably will end up paying for all or part of that college expense over time. 

When it comes to paying for college over time, you have two choices. You can:

  1. Start saving for college ahead of time and let the interest you earn offset some of your out of pocket costs; or

  2. Borrow later and pay all that interest to the bank.

The following example will help illustrate what these two options mean in terms of the overall cost of college.

According to Sallie-Mae, in-state tuition and fees for California public universities will average just over $14,000 in 2009. Though it is completely unrealistic, for the simplicity of my example, let's ignore inflation and assume that four years of tuition and fees will therefore cost $56,000.

If I pay for tuition with private student loans at an 8% interest rate, my debt will be $68,132 by the time I graduate (the interest is added to the loan balance while I'm in school). If I amortize the debt over 180 months, my monthly payments will be $651 and my total outlay will be over $117,000. In other words, the borrow later strategy more than doubles the cost of my tuition!

On the other hand, if I start saving that $651 per month now and earn 8% interest for 7 years, I will accumulate more than enough money to pay for tuition--even adjusted for inflation. My total out-of-pocket cost will only be $54,684. The rest of the growth will come from interest compounding on interest to my benefit, not the bank's. It's a no-brainer.

529 Plans

529 plans make saving for college even easier because the money in the 529 plan accumulates tax-free as long as the money is eventually used to pay for higher education expenses (tuition, fees, books, room & board.) Even more impressive is that you can prepay up to 5 years of the annual gift tax exclusion into a 529 plan for a given beneficiary. This means you can put $65,000 ($13k x 5 years) into the account right now without worrying about gift taxes and let that principal immediately start working for you.

Another nice benefit of 529 plans is that you retain control of the assets even though the assets are technically no longer part of your estate. This means if your chosen beneficiary decides to take a different path and skip college, you don't have to worry about them taking the money and having a party (one of the real dilemmas under UTMA accounts.) Instead, you simply change the designated beneficiary to another relative (which is very loosely defined for 529 plans) and maintain the tax advantages of the account. Contribution limits on 529 plans are very high--often over $200,000--but you need to check with each plan to learn their particulars.

Ever since Section 529 of the IRS code was created, families all across America have been trying to navigate the murky waters of the 529 savings plan world; and most people drown before they ever open a 529 savings account.  Of those who do finally open one, most are still unsure if they have chosen the right plan and investments.  And, most of them push it to the back of their mind, dangerously leaving the plan on autopilot.  

We recognized the problems families like you face with 529 plans, and we decided to do something about it (and it took long enough for someone to do so).  Until now, there has never been an easy, low cost, yet highly personalized and professional advising solution for 529s.  Once 529s were daunting, but now they're a breeze with My529Advisor.Com

There are four main questions that families saving for higher education need answered:

  • What is the best performing 529 savings plan that is best suited for me?
  • What investment options are the best for me and how should I allocate my contributions among them?
  • How much should I be contributing to each of my kids' accounts and am I on track?
  • Is my 529 plan being updated and managed properly in order to be an efficient higher-education-funding-machine? 

My529Advisor is the one-stop answer for all of these questions.  We deliver to you an annually updated, personalized 529 savings plan recommendation and action plan.   And we do it at a fraction of the cost a typical financial adviser would charge.