Why Saving Early for College is So Important

A recent Sallie Mae study shows that on average, parents begin saving for college when their child is 7 years old. This makes sense: it’s right around when a child transitions from preschool or full-time daycare to full-time school, so for many families it’s the first time that they have any financial breathing room.

But while it’s reasonably well-known that starting early on retirement savings yields much better results than waiting, it’s less well-known that starting early on college savings provides even more dramatic results. The logic behind either of these is simple: The more time your money has to compound, the greater the future value. And 529 saving portfolios have even more significant benefits to early savings: Because their glide paths are quite compact, missing out on early savings years means missing out on the most aggressive growth years.

An age-based portfolio in a 529 account is similar to a target date fund in a retirement account in that investments follow a glide path where they start out aggressive and over time, as the saver approaches the target, become more conservative. But there’s a big difference in the glide paths between 529s and retirement savings: a typical target date fund for retirement goes from around 90% stock to 50% stock over approximately 50 years. By contrast, a 529 account may go from 90% stock to 100% fixed income over just 18 years.

Here’s Vanguard’s target date funds glide path, starting 50 years from retirement:

Vanguard TRF glide path

Here’s the Utah Education Savings Plan’s glide path, starting 18 years from college:

UESP glide path

So parents who wait until age 7 to begin saving miss out on the potentially highest-returning years of a college savings plan. In fact, in the Utah plan, the 0-3 year age-based moderate option’s average annual return has been at least 1% higher than the return for the 7-9 year band on a 3-, 5-, and 10-year basis and since inception.

How does that play out over time? Let’s say a family saved $10 per month for college using the Utah plan’s moderate option. If they started at the beginning of each age band and earned the average return each year, here is what their 529 account would be worth at high school graduation:

Start Age Total Contributions Balance at 18 Growth
0  $                              2,160  $                 3,789  $        1,629
4  $                              1,680  $                 3,102  $        1,422
7  $                              1,320  $                 2,007  $           687
10  $                                  960  $                 1,350  $           390
13  $                                  600  $                     819  $           219
15  $                                  360  $                     516  $           156
16  $                                  240  $                     246  $                6

So the family who started at birth would end up with almost twice as much in the account as the family who started at age 7. Plus, 43% of the balance of the account that was started at birth was account growth– free money– compared with just 34% in the account started at age 7.

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