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Planning for college? Save now to avoid borrowing later.

Have you just begun to think about how you'll pay for college? Then think about this: Not all of those ways are created equal. By starting early and saving a little at a time, you may be able to avoid costly student loans later on. Avoiding procrastination could save you thousands of dollars.

Father and young son reading together

Key takeaways

  • The earlier you start saving, the more your investment can potentially earn.
  • Remember that interest rates on a loan will cost you much more down the line.
  • Setting up automated savings can make it easier to set aside a monthly amount.

Compare saving versus borrowing to pay for college costs.

The cost of college is daunting, and it's easy to put off saving for it. After all, you could always get a loan, right? Here's an example of two ways to arrive at the same destination. In both cases, your hypothetical goal is to have $25,000 to pay toward college costs.

Save.

If you start now, setting aside $152 per month in a 529 education savings account, you’ll have invested about $18,000 over 10 years. Add in a 6% average annual return, and you wind up with $25,000.

Borrow.

If you borrow that $25,000, you’ll be paying interest, not earning it. Assuming you have 10 years to repay at a 6% interest rate, the student loan payments after graduation would be about $280 per month. You’d wind up spending more than $33,000 to repay the $25,000 loan. That's going to cost you $15,000 more than if you had put money aside earlier.

Assuming you’ll need more than $25,000 for college, think about how much more your monthly loan payment could be.
The chart below shows a comparison between saving now and borrowing later.

Saving $152 a month can add up to $18,240 over ten years. Borrowing and making a loan payment of $278 a month means you might pay a total of $33,360 over ten years.

Set your priorities.

For your child, starting life free of college debt can be a real boost. For you, having more money to put toward your own retirement — instead of paying interest on college loans — can help keep you on track for that important goal. A financial advisor can help you prioritize your education and retirement goals.

You’re not alone.

Parents, grandparents, other family members and friends can contribute to your child’s 529 savings plan, so you don’t have to go it alone when saving for his education.

Save early and often.

Clearly, it’s a better deal to save small amounts now rather than pay larger amounts later. As a new parent, saving now for your child’s college education may not feel like a top financial priority. But there are many benefits to starting sooner that can make college planning easier when the time comes.

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries. 

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. 

If withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. State tax treatment of K-12 withdrawals varies. Please consult your tax advisor for state-specific details.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation. 

Copyright © 2019 Capital Group. All rights reserved.

American Funds Distributors, Inc., member FINRA.

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