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Save Now or Pay More Later

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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.*

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Additional Benefits

Using savings to pay for college instead of borrowing has other benefits that can pay off in the future.

  • Learning to focus on saving now can be the start a good habit for a lifetime of financial success. If saving is expected of you at a young age, it will become a habit that will likely continue into adulthood when a solid savings account can prevent economic distress in emergencies.
  • Saving money typically means maintaining a saving account, at minimum, and potentially includes options such as CDs (certificates of deposit). You need to work with either a bank or credit union to have your money work for you while you save it. Building a positive relationship with your financial institution can benefit you when it comes time to take out a loan for a new car or home.
  • Limiting or eliminating borrowing for school can prevent stress after graduation. It can mean the difference between working one job and living on a comfortable budget instead of working a second part-time job simply to pay monthly student loan bills. See other problems with overborrowing.

* The $9,897.10 amount of interest assumes:

  • John is in school for four years.
  • John borrows a total of $20,000 ($5,000 for each of four years) in federal unsubsidized loans.
  • The loans have a fixed interest rate of 4.29% and a 10-year repayment period.
  • 360 days per year.
  • 30 days per month.
  • In-school interest accrual begins at loan origination, capitalizing once at the beginning of repayment (after 51 months for Year 1 loans, after 39 months for Year 2 loans, after 27 months for Year 3 loans and after 15 months for Year 4 loans).
  • There are no origination fees.

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