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 2019—2020 school year, college tuition rose 3.4% for 4-year private, nonprofit institutions and 2.3% for 4-year public, in-state institutions. The total cost of 1 year, including tuition, fees, and room and board, averaged $49,870 for a private, nonprofit school and $21,950 for a public, in-state school.*
*The College Board, "Trends in College Pricing 2019."
Saving now can help ease future debt
Considering the high cost of college and today's economic climate, you may think it is better to just wait and borrow the money when it comes time for college. But saving in a 529 plan like College Savings Iowa can make a big difference in the amount of debt your child or grandchild will carry.
"Investing in a college savings plan before it is time for your child to attend class can cost a lot less than paying interest on a loan long after he or she graduates."
Michael L. Fitzgerald, Treasurer of State
Consider these scenarios
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!**
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.