Minnesota College Savings Plan

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College: The way you pay matters

Sep 28, 2016

September 1st kicked off College Savings Month — a time to assess your savings goal progress. As college costs continue to rise, more students are relying on loans to pay for tuition and supplies. Although using loans is common, the long-term impact of carrying large amounts of debt post-graduation can come as an unwelcome surprise to many young adults. Fortunately, there are steps families can take to help students reduce the need to borrow.

Loan debt and life after college
A recent government study, Report on the Economic Well-Being of U.S. Households in 2015, published in May of this year cites the average monthly loan payment graduates are making as $533. Making that payment, along with covering rent, utilities, and basic needs on an entry-level salary can be daunting. Add trying to save for a wedding, car, or a down payment on a home into the mix, and it’s easy to see why young people are frustrated.

What’s more, for some juggling all of those bills can lead to late or missed payments, which in turn can hurt credit scores and add one more hurdle to overcome.

As the chart below illustrates, an education funded by savings costs less than one funded by loans. If you’re relying largely (or entirely) on savings, the cost to you is simply the amount of money you put into your account. If your account offers a rate of return or interest, you have the potential to earn money on top of your savings. If your account offers tax-free growth of any earnings, you have the potential to keep more of what you earn. By contrast, loans charge you interest so you wind up paying more than the amount of college tuition and other related expenses.

Source: Savingforcollege.com
This chart hypothetically assumes four years of college (current annual cost of $20,000) for a child born today. To meet that expense 18 years from now, you would need to save $448 per month (from birth) in a 529 plan — totaling $207,456; $113,000 in contributions and $94,456 in earnings, assuming a conservative 5 percent college cost inflation rate and a 6 percent annual investment return. If the same funds were borrowed to pay for college rather than saving and investing your child would graduate owing about $276,383 in loans. This translates into a monthly payment of approximately $2,303 over 10 years, assuming a 6 percent loan interest rate. In other words, college would end up costing an additional $163,383, or more than double in out-of-pocket costs, than if you had saved and invested in advance.

Saving strategies for kids of all ages
If you’re a young parent, you may be feeling the squeeze firsthand. And, given recent trends, chances are good that you put off starting your family until your debt was under control.

 

Save first
So how can you help your own children avoid the same squeeze when it’s time for them to head to college? Start saving now, even if it’s a modest amount every month. Minnesota College Savings Plans can be opened for $25. There is no application fee, no sales fee, no commissions paid on accounts, no annual maintenance fee, and our asset-based fees rank fourth lowest among direct-sold 529 plans nationwide* — all of which helps make saving for college more affordable for Minnesota families.

Cost-effective college credit
As your kids get a little older, taking Advanced Placement (AP) classes in high school can be a way to get college credit before college (and reduce the number of classes you’ll need to pay for). Enrolling in a two-year community college or technical college to cover freshman and sophomore level classes can also be more affordable than going directly to a larger university or college after high school. Just be sure to research which credits transfer from one institution to the next.

Start saving early, and save often
There is a clear advantage in starting your child’s college savings as early as possible. (Remember, it’s good to save whatever you can whenever you can, so if your “baby” is a tween, don’t use that as an excuse to avoid saving.) Starting early can position you to best harness the power of compounding, the calculation of return/interest on initial principal plus the accumulated interest from prior periods. Investopedia encourages investors to think of compounding as “interest on interest that will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.” (Investopedia.com, 8/31/2016) Try our calculator to get an idea of how your savings can add up.

Contributing to your child’s account regularly can help you build savings and get closer to your goal. You can set up automatic deposits from a bank account or automatic payroll deduction. Although saving for college might feel unattainable, like any major financial goal, it’s much easier to potentially achieve over time.

This chart assumes a $5,000 lump sum investment, a $100 monthly investment and 6% annual rate of return. The calculations are for illustrative purposes only and the results are not indicative of the performance of any investments. The calculations do not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower. With any long-term investment, investment return may vary. Such automatic investment plans do not assure a profit or protect against losses in declining markets.

This chart assumes a $5,000 lump sum investment, a $100 monthly investment and 6% annual rate of return. The calculations are for illustrative purposes only and the results are not indicative of the performance of any investments. The calculations do not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower. With any long-term investment, investment return may vary. Such automatic investment plans do not assure a profit or protect against losses in declining markets.

Encourage family and friends to gift
You can also let family and friends know that the Minnesota College Savings Plan would be a welcome gift for birthdays, holidays, or graduations. They can contribute online or by mail.

Making a contribution to a Minnesota College Savings Plan is simple, and there are options for everyone:

  • eGift — Invite friends and family to gift into your child’s account securely, online at no charge.
  • Check/electronic transfer — Download a gift deposit form and mail to Minnesota College Savings Plan with a completed check (account owner will need to share the Minnesota College Savings Plan account number) or make a one-time electronic transfer from a bank account.
  • Open a Minnesota College Savings Plan account for the child or grand-child in your life and set up automatic contributions.
  • Visit Mnsaves.org/gift for downloadable gift certificates to let your loved one know a contribution has been made.

Adding it all up
With commitment, a plan that’s right for your family, and savings tools such as the Minnesota College Savings Plan, you can make a real difference when it comes to paying for your child’s higher education costs.

Ready to open your own account? Visit Mnsaves.org to get started.

* The Strategic Insight 529 College Savings Quarterly Fee Analysis (Q2 2016) is based on program descriptions and participating agreement documents gathered by a third-party research firm and analyzed by Strategic Insight. As part of the process, Strategic Insight analyzes the 529 program manager and state agency disclosure statements, press releases and organization websites to ensure data quality and categorization. The average minimum, maximum and total annual asset based fees at the plan levels are calculated via an un-weighted index average, or arithmetic mean method.

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