College Savings

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Saving for college now means less to borrow later

May 15, 2017

For most families, the cost of college proves to be worth it in terms of return on investment. In fact, over a lifetime of working, college graduates will make $1 million more than high school graduates, according to the Center on Education and the Workforce at Georgetown University. But when it comes to paying for college, the cost is still steep, leading many families to take out loans. To reduce the amount that you or your student might need to borrow for college, you should consider investing in a 529 college savings plan when your child is young.

Save more so you can borrow less

Open a Vanguard 529 Plan account today!

When you start saving early—and regularly—you harness the power of compounding (when your investment earnings are reinvested and, in turn, generate more earnings). And if you're invested in a tax-advantaged 529 college savings plan, you could realize even greater savings growth. Ultimately, the more you save, the more you could earn and the less you may have to borrow.

Compare the numbers

Suppose you start saving $100 a month in a tax-free 529 plan when your child is born. In 18 years, assuming 6% average annual investment earnings, you could have $37,086 to use for college expenses. That's $15,486 more than you invested—and that you won't have to borrow!

On the other hand, if you (or your child) borrowed $37,086 at a 6% interest rate it could take ten years to pay off the loan. With a monthly payment of $411.73, the total amount owed (with interest) would be $49,408—about $27,808 more than if you had saved regularly. Think of all the things you or your child could do with that money—save for retirement, buy a car or a house, travel—instead of having to pay off a loan.*

Saving versus borrowing chart 1

It all boils down to this: The more you save, the more your money can work for you and the less you (or your child) will have to borrow and repay with interest. And even if your child is already a teenager, there's still time to start saving. Why not begin now?

*This hypothetical example doesn't represent the returns on any particular investments, and the final account balance reflects no taxes or penalties that may be due upon distribution.

Sources: The Economic Value of College Majors, Center on Education and the Workforce, May, 2016; Bankrate; Investor.gov

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • The availability of tax or other benefits may be contingent on meeting other requirements.
  • A plan of regular investment does not ensure a profit or protect against a loss.
  • For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risk, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
  • For more information about The Vanguard 529 College Savings Plan, call 866-734-4533 or obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor and Underwriter.
  • The Vanguard 529 College Savings Plan is a Nevada Trust administered by the Board of Trustees of the College Savings Plans of Nevada, chaired by the Nevada State Treasurer.
  • The Vanguard Group, Inc., serves as the Investment Manager and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, Inc., serves as Program Manager and has overall responsibility for the day-to-day operations, including effecting transactions. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds.
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