Why It Pays Off
Saving any amount of money can make a big difference in what you can afford to pay for college. The earlier you start the better, but don't pass altogether because you think it's too little or too late.
Harness the Power of Interest
For every dollar you save, you earn money through interest. The longer you save, the more money you earn. For example:
- A family that saves $50 per month from the time their daughter is born will amass more than $16,000 in savings by her high school graduation. Almost $6,000 of this is interest earnings.
- If the same family starts saving when their daughter is seven years old, they would need to save about $100 per month to save the same amount.
Save More Now, Borrow Less Later
Remember, college is a long-term investment. Like other investments, such as buying a home, most families pay for college through a combination of savings, current income, and borrowing. This means that the more you save, the less you'll need to borrow, and the less you'll need to take from current income.
Will Saving Hurt My Financial Aid Chances?
Despite what you may have heard to the contrary, saving pays, even when it comes to receiving financial aid.
The amount you'll be asked to pay for college is based on your family's income and assets. Savings are considered an asset. However, current financial aid formulas only "tax" about five percent of parental assets each year. That is, the formulas assume that five percent of your parents' assets are available each year to help pay for college.
For Example
If a family has saved $20,000, they'll be asked to contribute about $1,000 of this savings per year to college expenses. Say their expected family contribution is $10,000. That means that while only $1,000 of their assets is being "taxed," the family can, at their option, use a greater part of their savings to meet educational expenses and reduce their need to borrow.
A family with the same income and significantly less in assets might only be expected to contribute a total of $9,000, but they'd have to rely on loans to make up the difference. The family with the greater savings is in a much better financial situation and may find they have more options in making educational choices.