While the recession has taken a toll on Americans' ability to save money for college, there are some encouraging signs from families using Section 529 college savings plans, according to a trio of reports released today as part of College Savings Month.
While the recession has taken a toll on Americans’ ability to save money for college, there are some encouraging signs from families using Section 529 college savings plans, according to a trio of reports released today as part of College Savings Month.
Less than a third of American families (29%) are on track to reach their savings goal for college, according to “How America Saves for College,” an annual study by SLM Corp., better known as Sallie Mae, a leading student lender.
Families are saving an average of $2,676, or 3.6% of their annual income, for college annually, according to the study, which was based on the responses of 1,200 parents of children under 18 taken by Gallup Inc.
However, the study estimated that parents will need to save an average of 5.7% of income annually to meet their savings goal by the time their child goes to college.
What’s more, parents’ confidence in their ability to save for college sharply declined over the past year as they saved less and relied more on grants and student loans, according to “The State of College Savings,” a survey of 800 parents conducted by the College Savings Foundation, an association of financial-services firms with an interest in the 529 industry.
The incidence of parents who said they are “not very confident” that they will reach their college savings goals jumped to 44%, compared with 31% in 2008. One-third of parents surveyed by the CSF said they are saving less for college this year than last year, and 41% said they have saved nothing at all over the past year.
Nearly half (47%) of parents surveyed said they expect student loans to pay for college, up from 37% last year. The incidence of parents’ expecting financial aid also rose to 73% this year, from 62% in 2008.
In addition, parents of children in high school believe they will not be able to pay as much for college costs as they did last year, according to Fidelity Investments’ annual “College Savings Indicator” study of 2,300 parents across the country.
Those parents believe that they can cover only 11% of the total cost of their children’s college education, down from 15% last year.
The good news, said Jeff Troutman, Fidelity’s vice president of college savings, is that parents using 529 plans are doing much better.
According to the Fidelity survey, parents who use a 529 plan expect to cover 36% of their children’s college costs. In fact, 32% of surveyed parents were found to be using 529 plans this year, up slightly from 30% last year.
Financial advisers are also providing valuable assistance to parents saving for college, Mr. Troutman said.
Parents working with advisers received guidance on adjusting investment strategies, exploring supplemental funding sources and using rewards programs to increase college savings, according to the survey.
“Our research demonstrates the valuable role that advisers play in providing guidance, especially in tight economic times,” Mr. Troutman said. “It also highlights an even larger opportunity for advisers to offer holistic college-planning advice, not just in savings but in securing different types of financial aid.”
529 plans are also becoming more popular with families who have younger children, according to the Sallie Mae study.
One-third of parents saving for college are using 529 plans, the study found, but 43% of parents with children under 7 are contributing to the plans, compared with only 20% of parents with teenagers.
The CSF study also underscored the effectiveness of 529 plans.
Parents owning 529 plans are the most successful group in saving for college, it found.
Nearly two-thirds (61%) of parents with 529 plans have saved more than $5,000 per child, compared to only 22% of parents who do not have a 529 plan, according to the survey.
The results of the study demonstrate the need for parents to save “early and often,” said the CSF’s chairman, Kevin McMullen, counsel for State Farm Mutual Automobile Insurance Co.
“The economic reality is that parents cannot count on college loans’ and grants’ being available or affordable when their children reach college age,” he said.
