Paying for college may not be top of mind for new parents, but starting to save early gives a child more options for the future. Students with college savings have access to more resources and are able to enroll in a more expensive college than they otherwise could afford.
More families had a plan to pay for college in 2019 than in 2018, according to Sallie Mae’s 12th annual How America Pays for College report. The families who planned ahead had more available options, spent more money on college and were more satisfied with their college decision and how they paid for it.
Cost was the biggest factor (77%) for families during the college selection process, followed by academic criteria (73%) and personal preference (66%).
Parents who plan ahead save more for college
Parents who planned ahead for college spent, on average, 24% more on college during the 2018-19 academic year than parents who didn’t plan ahead. The parents who prepared for upcoming college costs used twice as much of their income and savings to pay for college as the parents who were not prepared. Having more income and savings earmarked for college gave families access to more resources and more college options.
The earlier parents start to save for college in a 529 plan, the more time the funds have to compound tax-free. If you start making contributions when your child is born, you will accumulate about a third of your college savings goal in earnings. But, if you wait to start saving until your child enters high school you will need to save six times as much to reach the same goal.
Parents who plan ahead borrow less
According to Sallie Mae’s report, parents who planned ahead for college borrowed 9% of college costs, compared to parents who did not plan ahead, who borrowed 20% of college costs.
Planning for college helps reduce the need to depend on student loans. Families without college savings risk having to borrow too much for college and may struggle to repay their student loans in a reasonable amount of time. Every dollar a student borrows for college costs about two dollars by the time the debt is repaid.
Parents who plan ahead have a better understanding of financial aid
According to Sallie Mae’s report, 40% of families who planned ahead for college researched college costs and financial aid. These families received slightly more scholarships and grants than non-planning families and were more confident that they understood their financial aid award package.
The only way to get financial aid for college is to apply. All students should complete the Free Application for Federal Student Aid (FASFSA), and students attending certain schools may also need to complete the CSS Profile. The earlier a student applies for financial aid (on or after October 1), the more grants they are likely to receive.
Financial aid award letters can be confusing. Students should understand the difference between free financial aid (grants and scholarships), student employment (e.g., work-study) and student loans that have to be repaid. The total amount a student borrows for college should be less than their expected starting salary. Otherwise they may not be able to repay their loan in full within 10 years.
Top ways families prepare for college
Families reported different ways of how they planned to pay for college:
- Save for college (64%)
- Research college costs and financial aid (40%)
- Budgeted amounts to be used from savings, scholarships, financial aid and student loans (36%)
- Student earns college credit through AP courses or dual enrollment (36%)
- Parents set a bottom-line figure for college cost (16%)
- Investing in the student’s skills to increase likelihood of winning scholarships (16%)
- Other (5%)