Is it still better to save or borrow for college in 2021?


“Can’t I wait for the government to pay for the university?” said one of my clients. They were restless because we were talking about saving for their newborn baby after they had just finished paying off their own student debt. The idea of ​​saving for college on top of budgeting, protection planning, retirement savings, and whatever else pushes a person in a hundred directions in life infuriates them.

Especially with the transition from the Trump administration to the Biden administration, and with $ 1 billion in loans being canceled, Americans are increasingly wondering if they should save for college. However, there are many reasons, both qualitative and quantitative, why it makes more sense to save than to borrow.

The cost of borrowing versus saving

There is a much higher cost of borrowing to pay for college education than using savings. To understand the cost of saving versus borrowing, we need to make some assumptions. Studies have shown that many families don’t start saving for college until their child is between the ages of 9 and 11. Suppose they attend a typical four-year public school, which today costs around $ 26,820 according to the College Board. Suppose college inflation is around 3.7%, the average investor receives a return of around 6%, and the cost of borrowing is on average 5.3% with a payback period of 10 years.

This relatively modest assumption, to pay for college at a four-year public school in the state, would require contributions of $ 814 per month to fully fund total contributions of $ 117,220. However, if you were dependent on the loan, it would cost $ 202,907, or 58% more, according to Savings and loan calculator. The earlier you start investing in higher education, the greater the benefits in terms of lowering the cost of debt. Start when the child is a newborn and the cost of borrowing balloons is $ 162,505 more than saving.

What does the loan look like

Most Americans need some form of financial assistance to pay for their higher education, whether it’s scholarships, grants, student loans, etc. The bulk of college education is still paid for by parents’ income and savings, according to Sallie Mae, representing approximately 44% of the funding. Yet 34% of students borrow to cover their deficit.

Student loans are not inherently bad, allowing people who might otherwise not be able to access higher education to pursue better careers. However, the types of loans available and their rates vary widely. A federal loan generally varies between 2.75% and 5.3%, according to Nerdwallet. But private loans can go up to 15% depending on the borrower and their circumstances, with some studies suggesting that up to 7% of students use credit cards to pay for their expenses. Therefore, student loans need to be carefully assessed and managed for borrower repayment, which many young adults fresh out of high school may or may not fully understand.

The debt will simply be forgiven, right?

According to US Department of Education data, of the 227,382 unique borrowers who submitted public student loan forgiveness requests in November 2020, only 3,776 were processed, or less than 2%. Almost double that number – still only 4% of total applications – were deemed eligible. Therefore, as long as it is possible While your loans may be canceled, it is not a good idea to incorporate loan forgiveness into a higher education funding strategy.

College costs are unlikely to drop

This is where the problem lies: since 1971, the cost of college education – including tuition, fees, accommodation and meals – has increased more than 17 times in private 4-year schools and almost 16 times in public 4-year schools. When adjusted for inflation, it’s still 2.7 and 2.5 times more expensive, respectively, according to data from the National Center for Education Statistics, College Board, and FRED (Federal Reserve Bank of St. Louis).

The average cost of one year of college studies at a four-year institution for the 2020-2021 academic year was over $ 50,000 at a private institution and over $ 22,000 at a public college, according to the College Council. Outright paying for college is nearly impossible for most Americans without help, whether it’s financial aid or debt.

There is also evidence to suggest that government subsidies in the form of grants, scholarships, preferential loans, and other aids cause higher education costs to increase, perpetuating higher inflation. With increased forgiveness programs – which tackle the symptom rather than the cause – tuition inflation will likely continue to rise. Additionally, even if tuition fees were to be completely eliminated, tuition fees are only a fraction of college costs once fees, room, board, travel, and supplies are factored in.

Savings are a guarantee of uncertainty

Johnny Carson once said, “The only problem you have with money is the independence of not worrying about funds.” Every dollar you save is a dollar you know you have when you need it. Whether the government increases or decreases funding for higher education, the interest rate for borrowing increases or decreases, the money you’ve saved gives you more flexibility to make decisions in the future, rather than ” be beholden to lenders.

Brian Boswell is a registered representative of and offers securities through MML Investors Services, LLC. SIPC member., 101 Federal St, Suite 800, Boston, MA 02110. Tel: 617-439-4389. CRN202303-280748.

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