Families Are Saving More For College, But Still Not Doing Enough
Posted By Donna Fuscaldo on October 2, 2015 at 10:52 am
Saving for college has reached an all-time high, yet parents are still under-saving when it comes to higher education, according to Fidelity Investments’ 9th Annual College Savings Indicator.
The survey, which polled 2,470 families with children 18 years or younger and household incomes of at least $30,000, found that 69% of parents have started putting money away for college. Of that group, 73% are saving monthly, putting away an average of $232 a month, while 62% said they have a financial plan in place to help them reach their college savings goals. Of the families who are saving, 39% are using a 529 college savings plan to put away money for school. An overwhelming majority have increased their savings in the last 12 months, or kept it at the same rate as last year.
“These are positive directional trends,” says Keith Bernhardt, Vice President of Retirement and College Products at Fidelity Investments, of the increase in savings. “That doesn’t mean there isn’t room for improvement.”
Parents try to escape the mistakes of the past
The increased effort on the part of families around the country to put money away for college comes at a time when post-secondary school tuition is skyrocketing, and many people are questioning the worth of a college degree. According to the CollegeBoard, tuition for a four-year non-profit school was $28,476 in the 2009-2010 school year and has since increased to $31,231 for the 2014-2015 school year. The cost of a four-year public school was $7,825 for the 2009-2010 year – that increased to $9,139 for the 2014-2015 year. And student loan debt, which stood at an all-time high of $1.2 trillion in 2014, up from $260 billion in 2004, is causing financial pains long after students graduate. More graduates are defaulting on loans, putting off saving for retirement or taking on second jobs just to make their monthly payments. Parents don’t want to put their children in the same dire situation and are working harder than ever to save more for college.
Fidelity found that 87% of millennial parents said their own student loan debt is motivating them to help their children save more for college. In fact, millennials plan to cover 74% of their children’s college costs. What’s more? 46% said they plan to cover the full cost of college, compared to 32% of Generation Xers and 27% of Baby Boomers. Overall, parents said they plan to cover 66% of college costs for their children. That’s up from 64% a year-ago.
According to Bernhardt, while families are trying to avoid the mistakes of the past when it comes to student loan debt, the economy is also playing a role in the increased savings. Because the economy has improved over the last several years, parents and grandparents have more money to save for higher ed.
Not saving for the entire college bill
While any saving for college is going to help parents with a huge school bill, the 66% most parents are pledging to save won’t be enough to cover all of a four year degree. And that doesn’t even take into account if a child ends up staying in school for more than four years – a situation that’s increasingly common. Although few families pay the full sticker price for college, saving only 66% means they will have to figure out ways to cover the difference. Bernhardt says that families have to tap multiple sources when it comes to paying for college including savings, federal financial aid, scholarships and other grants. Loans, however, should be a last resort.
And even though parents are committed to saving two-thirds of tuition, that doesn’t mean they are close to reaching that. According to Fidelity, most families are on track to cover only 27% of higher education expenses by the time their child reaches college age. The study found that those underfunded savers plan on contributions from their children, as well as grants, scholarships, student loans, gifts from grandparents and other sources, to make up the difference.
529 plans growing in popularity
When it comes to saving for college, parents have many options. But a popular one is the tax-advantaged 529 college savings plan. These plans, which give parents a tax-free way to save, came on the scene in 1998. However, not all families are aware of them. According to the Fidelity survey, just 58% of families said they are very or somewhat familiar with 529s, up from 55% last. Fidelity also found that 39% said they opened up a 529 plan this year, up from 32% last year. According to Bernhardt, the growing awareness about 529 plans is due in a part to conversations with financial advisors, who are well versed in this tax-advantaged savings vehicle. Still, people who are aware of them will be better off in terms of saving for college.