Best Practices For Saving for my Child’s College Education
A recent survey on How America Pays for College 2020 by Sallie Mae of almost 2,000 parents and students of college-aged children revealed that families continue to value and invest in a college education.1 The research showed that for the thirteenth year in a row, 9 in 10 American college families agree that college is an investment in the student’s future.
Cost of College
On average, in 2020, American families spent $30,017 on college, which represents an increase from the previous two years.2 Parent income and savings covered the largest portion of education costs, 44% or $13,072, and scholarships and grants—covered 25% or $7,626. Money borrowed by students and parents paid for 21% or $6,581 of the total cost.
Surprisingly, fewer families report submitting the Free Application for Federal Student Aid (FAFSA) for the third year in a row. Seven in 10 families (71%) completed the FAFSA for the academic year 2019–20 compared to 77% in 2018–19 and 83% in 2017–18.
The Sallie Mae surveys show that the college-bound student most often decides which school to attend, but parents typically play a more active role in deciding how to pay for that education. Forty-five percent of families reported that the parent and the student made paying-for-college decisions together. In 36% of families, it was the parent’s responsibility, and in 19%, the student was the primary decision-maker.
Planning for College Savings
The Sallie Mae survey also shows that slightly more than half of the families plan to pay for higher education. The average saved by planners was over $28,000, and non-planners was only $15,000. But planners are three times more likely to be confident about meeting the cost of higher education.
Forty-four percent of families with higher education savings said they started saving for higher education when they were 6 years old or younger, 32 percent started saving when the student was 7 – 12 years old, and 16 percent when the child was a teenager.
More than one-third of families saving for higher education said the student contributes to those savings (37%). About half of high school families (48%) report having savings for their student’s future education, and they have saved, on average, $26,266.
Where is the Money Saved?
The largest share of college savings held by families with a high school student is in 529 plans. These college savings plans have 30 percent of the money American families have set aside.
However, more families use non-specialty accounts to save for college rather than accounts designed for education savings. This is surprising because of the tax advantages for 529 plans. Forty-two percent of families use a general savings account, the most common non-specialty account used. These families have saved an average of $13,270.
Other non-specialty accounts include checking accounts, used by 22 percent of families (average savings $9,010), CDs, used by 13 percent of families (average savings $14,048), US savings bonds, used by 11 percent of families (average savings $7,084), and noninstitutional savings, used by 6 percent of families (average savings $7,910).
How Should I Pay?
The good news from the survey results is that parents are taking on a more proactive role in saving for their child's college education. They are planning, knowing that a college education will likely cost more, which requires them to be proactive with their savings. The Sallie Mae survey shows that parents who have saved for college have more confidence that they can save enough, which takes this additional financial stress out of the equation.
The not so good news is that parents are not fully utilizing 529 college savings plans. These plans are specially designed to pay for college in a tax-efficient manner. Money set aside, specifically capital gains, in these plans will not be taxed if used for approved college education costs. Surprisingly, most of the college savings are taken from general savings accounts. Also, checking accounts and investment accounts are being used.
Less than half of parents are saving for college, with an average savings of $26,000. Their children are also helping to contribute to college, and studies show that when the student pays for some of their college education, they feel a great sense of ownership.
Top 5 Best Practices
Here are five best practices to save for a college education.
Save in a 529 plan: Parents should fully utilize 529 accounts as primary saving vehicles for college. Each state has its own plan, and you don’t have to use your state’s plan. There can also be an income tax deduction for states that have an income tax.
Start to save early: If you save early for college, it will be more manageable. Starting later is much harder since you have to catch up. The best practice is to save soon after the child is born, preferably into a 529 plan. Set up automatic monthly contributions to come directly out of your checking account. Set it and forget it is the best approach.
Have your child contribute to college education: As mentioned, having your child pay for part of their college education is a good idea. They can work in the summer or have a part-time job throughout the academic year. Even a small contribution from your child will make a difference.
Fill out a FASA: Surprisingly, only 7 in 10 families are filling out a FASA. Even if you don’t think you will qualify for financial aid, it is always good to fill out a FASA. This gives the colleges that you apply for information on your expected family contribution. The college can use this to determine how much tuition you should pay, given your ability to pay.
Start today! There is no one size fits all way to pay for college. Utilize these five best practices can put you on the right track to success. Talk to a financial planner to start saving today.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.