Paying for College: Should You Save or Finance a 4-Year Degree?

As tuition for a college or university education continues to rise, both parents and students struggle with paying for college; making the decision to save or finance a critical one.

The average annual increase in college tuition from 1980-2014 grew by nearly 260%, compared to the nearly 120% increase in all consumer items. Since then, the average cost of tuition, room and board, and fees at a four-year post-secondary institution has risen from $9,438 per year to $23,872 per year, according to the US Department of Education.

The numbers are even more disturbing when current costs for higher education are compared to those from the 1960s, when average tuition for a four-year degree was less than $500 per year.

Financial Aid Has Driven the Rising Cost of Education

While many believe that greed is the driving force behind the rising cost of higher education, and that we cannot rely on market forces to stem the tide, the stunning escalation can also be traced to the implementation of financial aid programs that began in the mid-60s. As recently as 1980, US enrollment was at 53%, yet had grown to 94% by 2012. One would think that, with demand so high, the cost of such a service would decline.

Of course, this has not happened. On the contrary, as seen above, the cost of college has risen by nearly 5000% since 1960. For many who’ve watched the escalation with growing concern, this trend is directly related to the passing of the Higher Education Act of 1965, which has been amended many times since it was enacted, and which forms the basis of current law authorizing the federal student aid programs.

Based on these facts, it can be argued that the heavy regulation and other interference (such as Title IX provisions) by the federal government has caused the escalating costs, having removed the controls imposed by market forces and competition for student dollars from the equation.

So, what’s the answer?

Financing vs. Saving for College

With the availability of college savings accounts in virtually every state, taking on the burden of debt to finance your child’s (or children’s) education makes little sense.

Commonly known as a 529 Plan, these accounts are tax-advantaged savings plans designed to encourage saving for future college costs. Such plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

Much like a 401K or IRA, a 529 Plan works by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. These are exceptional savings tools since, though contributions are not deductible, earnings in a 529 Plan grow federal tax-free, and will not be taxed when the money is taken out to pay for college.

Of course, choosing this path requires planning ahead and, if you have children you would like to see make it to college, you should begin saving immediately. To help you figure out how much you’ll need to save, you can find several college cost and savings calculators at SavingForCollege.com.

When it comes to financing a 4-year degree, it may be best left to your child to take on such a burden. After all, there is no guarantee they will even finish college and, if that were the case (and speaking practically), it would be easy to become resentful toward them for saddling you with such useless debt. Better to use that debt as motivation for them to complete a valuable degree in their own.

Looking for help to structure a plan where paying for college is less challenging? Wealth Attraction™ Coaching may be just what you need, not just to pay for college, but to secure your long-term financial future.

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