May 21, 2018
According to Sallie Mae's 2018 report, How America Saves for College, parents are making progress when it comes to saving for their children’s college education. The report was based on a survey of more than 2,000 parents of children under 18 and found that the average amount saved is $18,135. That is 10% more than the $16,380 average in 2016 and is the highest level of savings the survey has found since 2013.
There were two additional positive findings in the survey. First, parents are getting more realistic about paying for college. Specifically, many parents are coming to believe that the cost of college shouldn't fall only on them, especially as the costs rise. Respondents said they expect to cover about one third of the total cost of their child’s college costs. Additionally, close to 60 percent of parents said they expected their child to pay for part of their education, up from around 50 percent in 2016. As parents become more realistic about the costs of college and what they can contribute, I believe we can expect to see more of them planning and focusing on other resources, so that is good news.
On top of this, there was another excellent finding in the survey: Parents are shying away from mortgaging their future to pay for their child’s education. Just 10% of parents said they plan to tap their retirement savings for their child's education, down from 20 percent in 2016. Let’s hope this the start of a trend, Tom. As I have said many times, there are loans for college, but not for retirement.
Absolutely. First, the cost of college continues to move higher. According to the College Board, the average private nonprofit college charged $46,950 for tuition, fees and room and board in the 2017-2018 academic year, it is expected to continue to climb. This means that even as parents are saving more, they are not necessarily making a dent in the overall shortfall.
On top of that, just 39% of respondents reported that they were planning and saving for their child’s college expenses, while 17% said they were saving but not planning, and 44% said they were not saving at all.
Finally, and of particular importance for our community, there continues to be a significant gap between Black and Hispanic parents and white parents when it comes to college savings. The survey found the average college savings for Black respondents was $10,702 this year, compared to $23,460 for white families. This is another way the persistent wealth gap between Black and white Americans impacts our children’s future.
The most important thing to do is keep saving, or if you haven’t already, to start saving. Once you do, then you want to concentrate on growing that money. The two most common vehicles to do this are 529 plans and Coverdell Education Savings Accounts. 529 plans are offered in various states and can be used for undergraduate or graduate studies. In these plans, you’re typically given a menu of investment options to choose from. Keep in mind, 529 plans do come with some restrictions. Funds can be withdrawn tax-free only for qualified education expenses such as tuition, books, and room and board.
Coverdell Education Savings Accounts also allow your investments to grow tax-free, as long as they are used for qualified education expenses. But, money from Coverdell accounts can also be used for K-12 expenses, and you can choose your own investment options. Coverdell accounts are limited to a maximum of $2,000 per year, while 529 plans generally have higher contribution limits. Remember, if funds from 529 plans or Coverdell accounts are not used for qualified education expenses, there can be both taxes and penalties.
Remember, you want to be clear on the goals and objectives for these accounts. Consult your financial advisor to determine which type of account makes the most sense for your situation.
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