Saving Now Beats Borrowing Later When It Comes to College Costs

Pittsford, NY, July 22, 2013 --(PR.com)-- As Congress seeks consensus to prevent the interest rate on federally-subsidized student loans from doubling in the face of ever-increasing college costs, future college students and their parents are looking for new ways to tackle the challenge of affording college tuition.

The fixed rate on subsidized Stafford loans taken out after June 30, 2013 jumped to 6.8% when a law that had temporarily capped the rate at 3.4% expired. Even if a compromise solution that reduces rates is eventually agreed to in Washington, a high amount of uncertainty for the future of federal student loans leaves many families looking for other solutions.

"Saving early using a tax-favorable vehicle such as a 529 college savings plan is one such solution," says Megan Hurley, Research Director at college-savings website Savingforcollege.com. "Although total federal student loan debt recently passed $1 trillion, we are heartened to see total assets in 529 plans over $200 billion."

The argument in favor of setting aside savings is compelling. Savingforcollege.com's "529 Savings vs. Loans Calculator" demonstrates that saving for a 4-year old's future education costs (assuming a $25,000 current annual cost that inflates by 4 percent each year) with a 529 college savings plan that returns 6 percent annually will save over $152,000 when compared to using a mix of subsidized and unsubsidized loans with an average 8 percent interest rate and a 10-year repayment period. The difference increases with a longer repayment period.

The actual savings will depend on a number of variables, including the future cost of college, the investment return achieved by the 529 plan, and the rates and terms of loans actually taken out. The 529 Savings vs. Loans Calculator, accessible for free on Savingforcollege.com, allows the user to customize the fields to reflect their own situation for a more accurate estimate of what paying into a savings plan for college now looks like as opposed to paying off student loans later.