It's never too early or too late to start saving for college. Just save what you can, when you can. Here are some reasons why you should start now.
A promising future
Research supports the idea that saving for and attending college are important:
- Young people who expect to graduate from a four-year college and have a college savings account are approximately six times more likely to attend college than those without an account. (Elliott & Beverly, The role of savings and wealth in reducing "wilt" between expectations and college attendance; Journal of Children & Poverty, 2011)
- A college degree can have a big impact on future earnings power − as much as 65 percent more than the typical high school graduate over 40 years. (College Board: Trends in College Pricing, 2013.)
The cost of not planning ahead
College may be expensive, but if you plan ahead, it doesn't have to be out of reach. For the cost of a night out with the family, you can afford to invest every month. And studies have shown that regular investments can add up to a significant college nest egg over time.*
As you can see in this hypothetical chart, if an account owner began to save $50 a month when a child was 1 year old (with an initial contribution of $250), a 529 college savings plan could potentially have an account worth $16,677 by the time the child was college age.
While starting an account later in a child's life (say, age 15) could still result in tax-free assets of more than $2,000.**
Starting earlier can make a big difference!
Saving versus borrowing
With a combination of the high cost of college and today's economic climate, it may seem like a good idea to borrow for college when the time comes, rather than saving money now. But saving in advance can help in the long run. Consider these two hypothetical scenarios:
Scenario 1: Terry's parents start investing $100 a month into a 529 plan account right after Terry's birth. In 18 years (assuming a 5 percent annual rate of return), they could potentially save more than $35,000.*
Scenario 2: Terry has to borrow $35,000 to attend college. Based on a private student loan rate of 7.0 percent, Terry could be faced with a monthly payment of $406 for 10 years (or $48,720).***
*A plan of regular investment cannot ensure a profit or protect against a loss in a declining market.
**The hypothetical example assumes college begins at age 18 and is based on a 5 percent rate of return compounded daily, and is for illustrative purposes only. It does not reflect an actual investment in any particular 529 plan or taxes, if any, payable upon withdrawal.
***This hypothetical example is for illustrative purposes only and assumes no withdrawals made during the period shown. It does not represent an actual investment in any particular 529 plan and does not reflect the effect of fees and expenses. Your actual investment return may be higher or lower than that shown. The loan repayment terms are also hypothetical.