I was assured that I’d qualify for student loans by my parents. I was assured by the financial aid office that I’d qualify for student loans. Since loans were inevitable, I decided there wasn’t much point in saving for college. After applying for government-issued student loans, you know what happened? I qualified and was able to find plenty of student-loan resources to pay for my college education.
Not everyone receives enough financial aid to attend college. However, studies have shown that a majority of college students have found easy access to needed college loans, and a large number of students do, in fact, rely on this type of financial support to complete their degree. With the vast number of student loans young adults rely on, you can’t help but wonder if saving for college is important.
With mounting student-loan debt across the country, it is a crucial question that has far-reaching implications for parents and high school students. A recent article written by the Assets and Education Initiative at the University of Kansas and published at the St. Louis Fed might have a potential answer, as preliminary evidence finds college savings are far more beneficial than student loans.
More likely to enroll. A college savings account with even $1 or less will increase the likelihood a child will attend college from 45 percent to 71 percent. If you are looking to find ways to motivate your child to sign up for a college education, teaching the importance of saving for college could go a long way to encouraging enrollment.
Closer to completing degrees. One of the most-beneficial impacts to college savings over college loans is that students with savings are closer to completing their degrees than borrowers. Those with college savings were at least more than twice as likely to be on course to completing their degree program. Timely completion of a degree is an immense benefit to students; it reduces overall education costs, which is becoming more and more important as tuition costs rise. Delayed competition of a degree is also a key factor in preventing students from finishing their college education.
Why savings and loans make a difference. How can small amounts of savings make a big difference? The Fed publication is still working on a solid explanation, but the working theory is savings helps with a child’s mentality when considering school.
When savings build, it helps prospective college students form a “college bound” mentality—enabling young adults to focus their efforts and to make responsible decisions in advance. This investment in future college attendance leads to enrollment and steady attendance.
We’d expect this motivation to be strongest when a student has built up a large college fund. However, the big surprise shown in the study is how even sums of $1 can make a large impact on mentality.
If the reasoning in this survey proves true, the best way to encourage your child to attend college might be as simple as having them save $1 every week.
JP is a writer for the money blog 20's Finances. He is an MBA and the financial officer for a nonprofit organization.