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Investing Now is Cheaper than Borrowing 

Don’t Burden Your Student with Debt 

 

Many students do not qualify for need-based financial aid, such as that available from the federal government. For these families, financial aid often consists of student and parental loans, ultimately resulting in heavy debt burdens after graduation.
In 2011, two-thirds of college students graduated with an average of $26,600 in student loan debt. These graduates will still be paying off their loans when it’s time for their kids to go to college.


 COLLEGE SAVINGS PROFILE
 (Borrowing vs. Investing)

Mary and John Smith are reviewing their college financing options to see which is the most cost-effective way to fund John Jr.’s education. Assuming he attends a college that will cost $100,000 over four years, clearly the cost to invest is substantially less than the cost of a loan.

 

OPTION 1
COST OF INVESTING $58,320
They will need to invest $3,888 a year over 15 years, assuming a 6.5% annual return compounded monthly to reach their goal of $100,000.

 

OPTION 2
COST OF BORROWING $202,000
If they decide to fully finance his education with a loan, assuming a fixed rate 6.8% Federal Stafford Loan, Mary and John Smith will add $102,000 in accumulated interest to the total cost of their son’s education.
This illustration is hypothetical and not representative of the performance of any particular investment. There are risks associated with investing, including possible loss of principal. This illustration does not take into account the effect of the performance of different investment vehicles.

Source: Forbes, as of 8/7/13

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