There are many reasons why parents should save for their children’s college educations!
Good vibrations. Saving for a child’s college education creates and continually reinforces the expectation that the child will enroll in college. This improves the student’s academic performance and increases the likelihood that the student will enroll in and graduate from college. Some cities and states encourage families to create college savings plans by seeding a 529 plan with a small “birthday gift” upon the birth of a child or matching contributions by low-income families to 529 college savings plans. Examples include the City of San Francisco’s Kindergarten to College Initiative, matching grant programs for Arkansas, Louisiana, Maine, Nevada, New Jersey, North Dakota, Utah and Virginia, and birthday grant programs in Maine, North Dakota and Rhode Island.
It expands college choice. College savings provides the family with flexibility in college choice, allowing the student to enroll in a more expensive college that is a better fit to the student’s academic and career goals.
It is cheaper to save than to borrow. If the parents save $100 a month for 10 years at 7% interest, they will accumulate approximately $17,410. If instead of saving this amount, they borrow the money at 7% interest, they will pay $202 a month for 10 years, more than twice as much.
It reduces student loan debt. Even if the family starts saving late, a dollar saved is a dollar less borrowed. Every dollar borrowed will cost about two dollars by the time the debt is repaid, given the usual mix of interest rates and repayment terms.
The penalty for college savings is minimal. There is a slight reduction in eligibility for need-based financial aid, if the college savings are in the parent’s name. (A 529 college savings plan owned by a dependent student is treated as though it were owned by the parent.) Even with the savings penalty, the family has more money to pay for college than a family who did not save. For example, $10,000 saved in the parent’s name will reduce aid eligibility by at most $564. This leaves the family with $9,436 available to pay for college costs.
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