Updated: Dec 27, 2022
Time for a Paradigm Shift
The cost of a college education continues to rise at a rate higher than inflation with no end in sight. The gap between the cost of college and the ability to pay for it continues to widen, with that gap filled by more and more student loan debt.
Today total student loan debt exceeds $1.75 trillion – second only to home mortgages as the largest source of debt held by Americans.
As the largest provider of student loans, the federal government recently took steps to try to alleviate the problem. On August 24, 2022, President Biden issued an executive order that would forgive up to $20,000 of federal student loan debt for Pell Grant recipients and up to $10,000 for other qualifying borrowers. Should the president’s action be upheld by the courts, it will undoubtedly provide real relief to millions of Americans.
While outright forgiveness of debt by the federal government addresses the immediate needs of some individuals saddled with student loan debt, it doesn’t solve the larger problem. Right now millions of students are attending college paid for in large part with student loans. In a few years, they will enter the workforce and experience the hardship of trying to earn a living while paying down substantial debt. The cycle will repeat as the children of today grow up, borrow money to earn a college degree, and enter the workforce weighed down by more debt.
It's time for a paradigm shift.
One way to solve this perpetual crisis is to avoid student loan debt in the first place through savings. And the best way to save for education is through a 529 Plan. The example below demonstrates that disciplined saving over time is more efficient and cheaper than borrowing. 529 Plans provide the opportunity to maximize investment returns through compounding because taxes on earnings are deferred until withdrawn, and withdrawals are tax-free when used for qualified education expenses (which include student loan debt payments!). Finally, avoiding student loan debt frees up cash flow for investment elsewhere such as retirement savings.
Every dollar saved is a dollar not borrowed, and with capital growth, many dollars not borrowed. A greater emphasis on savings through tax-efficient 529 Plans is a step in the right direction toward solving the student loan debt crisis.
Today’s online platforms make it easier for families to save and most of them have reminders and automated monthly tools to help you save even a few dollars towards a long-term and far-reaching goal. It’s all about the small steps that you take every day and every month that can change your mindset from borrowing to saving.
We can also increase financial literacy training around the importance of saving versus borrowing and create a shift in our financial behaviors to break the cycle of borrowing and debt accumulation.