When planning for education after high school, saving instead of borrowing for college has one simple but very important advantage: It will cost you less money.
Saving $1,000, $5,000 or $20,000 before starting college is different than borrowing that same amount as it’s needed because of the interest you will have to pay on loans during repayment. Even though interest earned on any money you save may be limited in today’s financial environment, repaying interest on a loan will not be as minimal.
For example, Jane’s parents began saving for their daughter’s education when she was a toddler and have $20,000 in savings when she begins college. John’s parents, on the other hand, wanted him to pay for school himself, so he borrowed $20,000 during four years of college. Over time, John will pay back the $20,000 he borrowed plus an additional $9,897.10 in interest.*