Paying for college: Saving vs. borrowing

Saving in a College Savings Iowa 529 Plan now could cost you much less than borrowing money later.

For the 2021—2022 school year, college tuition rose 2.1% for 4-year private, nonprofit institutions and 1.6% for 4-year public, in-state institutions. The total cost of 1 year, including tuition, fees, and room and board, averaged $55,800 for a private, nonprofit school and $27,330 for a public, in-state school.*

*The College Board, "Trends in College Pricing and Student Aid 2021."

Consider these scenarios

Save now

In this scenario a family starts investing $25 a week in a College Savings Iowa 529 Plan account when their child is born. In 18 years when the student is ready to go to college, the family will have saved $23,400.

However, through the power of compounding, and assuming a 6% annual return, the family could have approximately $42,000 in their account to use for college. That is $18,600 more than they actually saved!**

Borrow later

In another scenario, the family does not invest in a College Savings Iowa account. When it is time for college, their child takes out a private student loan for $42,000 with a 7% interest rate. At graduation, the student will owe $58,440.***

If you compare the "save" scenario with the "borrow" scenario, you can see that saving regularly for college could end up costing $35,040 less than borrowing!

$42,000 for college: Save or borrow?

This hypothetical example is for illustrative purposes only. It does not represent an actual investment in a particular 529 plan nor does it reflect the effect of fees and expenses. It assumes the account earns a 6% annual return and that no withdrawals were made during the period shown. The final account balance does not reflect any taxes or penalties that might be due upon distribution. Your actual investment return could be higher or lower.

Saving even a little can beat borrowing

Most families combine some level of saving and borrowing when paying for college. However, if you set aside money early and often in a tax-deferred savings vehicle, like a College Savings Iowa account, you can build up your savings and hopefully have to borrow less.

Over time, regular contributions can potentially add up and become a college nest egg for you and your student.