Parents’ Complete Guide to Saving for College

Author
Abigail Eun
Abigail Eun
author

Abigail Eun is a freelance writer and personal finance expert. Through diligent research and continuous learning, she has honed her knowledge in budgeting, saving, investing, and debt management. Abigail is passionate about helping people get their finances in order. She believes that everyone should have access to the information they need to make sound financial decisions. Her goal is to provide clear and concise information that is easy to understand.

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Edited by
Emma Östlund
Emma Östlund
editor

Emma Östlund works as a business operations analyst at Sparrow. Emma studied Psychology, Computer Science, and Markets & Management at Duke University. With a well-rounded background in business and analytics, Emma strives to deliver data-driven conclusions and insights.

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Camden Ford
Camden Ford
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Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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Updated
January 18, 2024

According to a study done by Fidelity, 42% of parents wish they started saving for college earlier. While saving for college can seem like a daunting challenge, we’re here to help.

If you’re wondering when you should start saving for your child’s college education, you’re in the right place. Keep reading to learn about when you should start that college fund, how much money you should save, and what college savings options you have.

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When Parents Should Start Saving for College

The cost of college tuition rises annually due to inflation. In fact, between 1980 and 2020, the cost of tuition rose by 169%. So, it’s important that parents start saving for college as early as possible. 

That said, experts advise that worries about the “when” should not hinder parents from saving now. Annette VanderLinde, the Chief Client Officer for Portfolio Solutions, states that, “Either there’s too much stress placed upon opening a college savings account right after birth, or regret in not starting a savings account earlier. The key is to just get started and let go of the worry.”

Whether your child is six or sixteen, you should be looking into options and saving for college as soon as possible.

It is important to note that parents who begin saving later will have to contribute more money than parents who began saving earlier to “catch up.” Parents who begin saving earlier have time and compound interest on their side, meaning that their gains may be substantially larger.

>> MORE: Learn more about when parents should start saving for college

What to Do If You’re Getting a Late Start on Saving

If you are starting late on saving for college, it may be smarter to take on less risk as market fluctuations can be a detrimental player to your college savings goal. Perhaps it would be wiser to look into more safe, secure investments or age-based plans.

If you don’t reach sufficient savings, you should look into the different types of financial aid for college. Additionally, you can use Sparrow to find the best parent student loan rates and compare across multiple lenders in minutes.

>> MORE: Best parent loans for college

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How Much Parents Should Save for College

While there is no “right” answer to how much parents should save for college, here are some general guidelines for how much you should have saved by the time your child enters college.

The ⅓ Rule

The ⅓ rule states that parents should be able to pay for their child’s college in thirds:

  • ⅓ of the tuition should be paid by the parents’ income
  • ⅓ should be paid by savings
  • ⅓ should be paid for by grants, scholarships, and other sources of financial aid.

To calculate what ⅓ of tuition may cost when your child enters college, use a college cost projector calculator such as Vanguard’s. Then, divide the projected cost by 3 to find the amount you should aim to save.

For example, let’s say that your child was born in 2015. While you don’t know which school your child will attend, you know they will enroll in around 11 years. According to Vanguard, 4 years of college will cost around $167,266 total by that time. So, you’d want to aim to save $55,755.

>> MORE: What are the different types of financial aid options?

The 2k Rule

The 2k Rule expects that the cost of tuition will grow 3% above the national inflation rate in a four-year period and that parents will cover 50% of their child’s tuition with savings.

To calculate how much you will need to save to cover 50% of your child’s tuition with +3% to the national inflation rate every four years, take the following steps:

  1. Multiply your child’s current age by $2,000. (Ex. Your child is 16 years old. 16 x 2,000 is 32,000).
  2. Calculate how many years left until your child goes to college, and multiply that number by $2,000. (Ex. Your child is 16 years old and you expect them to go to college in one year. 1 x 2,000 is 2,000.)
  3. Add up the totals from steps one and two to determine roughly how much money you will need to save up to pay for 50% of your child’s tuition by the time they go to college. (32,000 + 2,000 is 34,000). 

Fidelity’s college savings calculator can also do the math for you.

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The Best Way to Save for Your Child’s College

As a parent, there are a variety of ways to save for your child’s college. Here are a few options to consider:

>> MORE: Best parent loans for college

529 Plans

A 529 Plan is a college savings plan that offers both federal and state benefits when you use the money for educational purposes. There are two types of 529 Plans: an educational savings plan and a prepaid tuition plan.

  • Educational Savings Plan: Parents can contribute money to the educational savings plan and choose investment options.
  • Prepaid Tuition Plan: Parents can pay tuition that is based on the current tuition in advance for a specific university/group of universities.
Pros
  • prosEarnings and withdrawals are tax-free for educational expenses.
  • prosInvestments can grow up to $500,000 over the life of the account.
  • prosWhen the owner of the 529 Plan is a custodial parent or the dependent student, the total value must be reported as a parent asset on the FAFSA.
Cons
  • consThere will be penalties if the money is used for non-educational purposes.
  • consLimited investment options in comparison to other savings options.

Mutual Funds

Mutual funds are a type of investment fund that allows you to diversify your stock holdings by buying different stock options instead of just one. Your investment portfolio is usually managed by financial advisors, to whom you give your money to. As a parent, this option is a great way to start saving for college.

Pros
  • prosMoney can be used on anything.
  • prosNo limits to investing.
Cons
  • consEarnings are subject to annual income tax.
  • consCapital gains are subject to tax when sold.
  • consEarnings made on mutual funds will be viewed on your child’s FAFSA, affecting financial aid eligibility.

Custodial Accounts

Custodial accounts are brokerage accounts that you open for your child and transfer to them once they reach the age of 18, 21, or 25 years old. You can invest in stocks, mutual funds, and bonds with a custodial account.

Pros
  • prosMoney can be used on anything.
  • prosNo limits to investing.
  • prosThe account’s value can be removed from your gross estate.
Cons
  • consYour child may be subject to the kiddie tax when they receive the account. The tax is on any unearned income they receive that exceeds $2,300 when or before they are 23 years old.
  • consThe brokerage account will be viewed as your child’s financial assets on their FAFSA, affecting financial aid distribution.

Savings Bonds

Savings bonds are securities that are backed by the United States Government. They are incredibly safe investments with a 100% money-back guarantee, along with any interest that accrues.

Pros
  • prosFederal tax-deferred and state tax-free.
  • prosSafe, guaranteed return on investment.
Cons
  • cons$10,000 limit for individuals and $20,000 limit for joint couples annually.
  • consLower returns compared to other investment options.

Roth IRAs

Roth IRAs are individual retirement accounts that you can put after-tax money into and enjoy tax-free growth and withdrawals. Penalties can be waived if money is withdrawn and used for educational expenses.

Pros
  • prosOffers a wide range of investment options.
  • prosNot counted as a parent asset on the FAFSA.
Cons
  • consMaximum annual contribution is $6,000 if you are under 50 years old.
  • consEducational withdrawals will count as untaxed income and reduce your child’s financial aid eligibility.
  • consOnly for individuals who earn less than $144,000 or joint individuals who earn less than $214,000 annually.

Should Parents Save for Their Child’s College?

Saving for your child’s educational expenses comes with many benefits. For one, it will alleviate the thousands of dollars in debt that your child will have to pay off. If you start early, you will have the power of compound interest and time on your side, allowing you to save more with less. Plus, it is better to save money now rather than borrow later.

>> MORE: Best student loans for parents with bad credit

However, there are certain things that are far more financially beneficial for your family and should take precedence over a college fund, such as:

  • An emergency fund: Every family needs a rainy day fund for any storms that life throws at you. Whether it is an unexpected medical emergency, a necessary home repair, or an out-of-the-blue expense, you’ll want to be prepared for whatever comes your way.
  • Paying off high-interest debt: High-interest debt is notorious for growing exponentially, putting many families in more debt than they expected in a short amount of time. Before your debt becomes a larger problem than it has to be, paying off your high-interest debt should be at the forefront of your financial priorities.
  • In some cases, a retirement fund: Retirement can be expensive. According to the World Population Review, you need at least $905,000 in your retirement savings to retire comfortably in 2022. It’s a difficult position to be in, but you’ll have to determine what costs more: the financial burden you may be on your children when you are retired versus the student debt your child will have to shoulder.

Saving for college costs should ultimately depend on your family’s financial situation. For some, it is more beneficial to save money now than to borrow later. For others, spending money to tie up loose ends is far more important than putting the money into a savings account.

>> MORE: Compare parent loan rates across different lenders

Student loan rates from our partners
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Ascent
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Varies
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Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills, or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 6/3/2024 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest rates require full
principal and interest payments, the shortest loan term, a cosigner, and are only available for our most creditworthy applicants and cosigners with the highest average credit scores. Actual APR offered may be higher or lower than the repayment examples above, based on the amount of time you spend in school and any grace period you have before repayment begins.

4.29 - 15.96%
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Variable APR

Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills, or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 6/3/2024 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest rates require full
principal and interest payments, the shortest loan term, a cosigner, and are only available for our most creditworthy applicants and cosigners with the highest average credit scores. Actual APR offered may be higher or lower than the repayment examples above, based on the amount of time you spend in school and any grace period you have before repayment begins.

6.23 - 16.09%
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LendKey
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660
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Fixed APR

1 – Terms and Conditions Apply

Loan products, terms, and benefits may be modified or discontinued by participating lenders at any time without notice. Rates displayed are reserved for the most creditworthy consumers who enroll to make automatic monthly payments. Your initial rate will be determined after a review of your application and credit profile. Variable rates may increase after consummation. You must be either a U.S. citizen or Permanent Resident in an eligible state and from an eligible school, and meet the lender’s credit and income requirements to qualify for a loan. Certain membership requirements (including the opening of a share account, a minimum share account deposit, and the payment of any applicable association fees in connection with membership) may apply in the event that an applicant wishes to apply with, and accept a loan offered from, a credit union lender. If you are not a member of the credit union lender, you may apply and become a member during the loan application process if you meet the lender’s eligibility criteria. Applying with a creditworthy cosigner may result in a better chance of loan approval and/or lower interest rate. Loans for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not available via LendKey.com.

2 – Cosigner Release

Some lenders participating on LendKey.com may offer the benefit of cosigner release. Cosigner release is subject to lender approval. In order to qualify, the borrower, alone, must meet the following requirements: (1) Make the required number of consecutive, on-time full principal and interest payments as indicated in the borrower’s credit agreement during the repayment period (excluding interest-only payments) immediately prior to the request. Any period of forbearance will reset the repayment clock; (2) The account cannot be in delinquent status; (3) The borrower must provide proof of income indicating that he/she meets the income requirements and pass a credit review demonstrating that he/she has a satisfactory credit history and the ability to assume full responsibility of loan repayment; (4) No bankruptcies or foreclosures in the last sixty months; and (5) No loan defaults.

3 – Autopay Rate Reduction

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments.

4 – AutoPay Discount & Lowest Interest Rate

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised APR is only available for loan terms of 10 years and is reserved for the highest qualified applicants, taking into consideration the applicant’s credit and other factors.

3.99 - 12.61%
Variable APR
Variable APR

1 – Terms and Conditions Apply

Loan products, terms, and benefits may be modified or discontinued by participating lenders at any time without notice. Rates displayed are reserved for the most creditworthy consumers who enroll to make automatic monthly payments. Your initial rate will be determined after a review of your application and credit profile. Variable rates may increase after consummation. You must be either a U.S. citizen or Permanent Resident in an eligible state and from an eligible school, and meet the lender’s credit and income requirements to qualify for a loan. Certain membership requirements (including the opening of a share account, a minimum share account deposit, and the payment of any applicable association fees in connection with membership) may apply in the event that an applicant wishes to apply with, and accept a loan offered from, a credit union lender. If you are not a member of the credit union lender, you may apply and become a member during the loan application process if you meet the lender’s eligibility criteria. Applying with a creditworthy cosigner may result in a better chance of loan approval and/or lower interest rate. Loans for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not available via LendKey.com.

2 – Cosigner Release

Some lenders participating on LendKey.com may offer the benefit of cosigner release. Cosigner release is subject to lender approval. In order to qualify, the borrower, alone, must meet the following requirements: (1) Make the required number of consecutive, on-time full principal and interest payments as indicated in the borrower’s credit agreement during the repayment period (excluding interest-only payments) immediately prior to the request. Any period of forbearance will reset the repayment clock; (2) The account cannot be in delinquent status; (3) The borrower must provide proof of income indicating that he/she meets the income requirements and pass a credit review demonstrating that he/she has a satisfactory credit history and the ability to assume full responsibility of loan repayment; (4) No bankruptcies or foreclosures in the last sixty months; and (5) No loan defaults.

3 – Autopay Rate Reduction

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments.

4 – AutoPay Discount & Lowest Interest Rate

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised APR is only available for loan terms of 10 years and is reserved for the highest qualified applicants, taking into consideration the applicant’s credit and other factors.

5.98 - 13.74%
lender Earnest logo
Earnest
Minimum credit score
650
Fixed APR
Fixed APR

Student Loan Origination (Private Student Loan) Interest Rate Disclosure:
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.54% APR to 16.74% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.87% APR to 17.10% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

4.29 - 16.49%
Variable APR
Variable APR

Student Loan Origination (Private Student Loan) Interest Rate Disclosure:
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.54% APR to 16.74% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.87% APR to 17.10% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

5.62 - 16.85%
lender College Ave logo
College Ave
Minimum credit score
Mid-600s
Fixed APR
Fixed APR

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

*The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 08/25/2022. Variable interest rates may increase after consummation.

This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 6/14/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

4.29 - 16.69%
Variable APR
Variable APR

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

*The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation. $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 08/25/2022. Variable interest rates may increase after consummation.

This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 6/14/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

5.59 - 16.85%

Closing Thoughts from the Nest

Saving for college as a parent can be a large concern. If your family is in the financial standing to save for college, remember to start saving early. Compound interest and time will be your two financial saviors in the face of college inflation.

Between the college fund options discussed above, be sure to thoroughly research each one to find what’s most suitable for you and your child.

Remember, not all families are in the position to start saving for college, and that is okay. Paying off high-interest debt, saving for your retirement, and adding to your emergency fund are all valid alternatives that will benefit your family in the long run.

Sparrow aims to give you the tools and confidence you need to improve your finances. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

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