We all know that college costs are high and getting higher. The good news is families are saving more than ever before and getting a plan in place. But will it be enough?
The average cost for tuition and fees at a private American university in 2016-17 is $33,480 or $9,650 at a public college, according to the College Board. If Junior wants to enroll at Harvard, that’s $45,278 not including room and board—17 times higher than in 1972 and far outpacing inflation.
How are parents coping? More than half (57%) are putting away money for college, up 9% over 2015 and just shy of 2010’s pre-recession levels, though they are parking it in regular savings or checking accounts versus tax-advantaged plans. And, they’ve been doing it for some time: most parents began saving when their children were just seven years old.
In addition, over the past four years those parents have been saving more dollars: for example, $16,380 compared to $10,040 in 2015 on average. This is according to the annual Sallie Mae-Ipsos study “How America Saves for College.” The national study released last fall surveyed 2,000 parents with children under 18 about why and how they are saving for their kids’ higher education.
Generational differences
While more people are preparing for the big tuition outlay, there is a generational difference in attitudes and behavior. Only half of Gen X parents are saving for their kid’s education, despite being the generation with the most pre-college kids. Millennials (under 35) and Baby Boomers (age 52 to 70) are currently saving at much higher rates—65% and 61% respectively. Not only are Millennials more likely to save, they save more dollar-wise: $20,155 on average versus Boomers ($18,323) and Gen X ($12,428).
However, despite putting aside more money, parents aren’t taking full advantage of tax-advantaged university savings plans. Perhaps it’s the high level of economic uncertainty these days that’s driving parents to keep their college savings flexible and accessible. The majority of parents (61%) have their money in low-interest-earning general savings accounts and 38% store it in no-interest checking accounts. These funds can be easily accessed if, say, the car breaks or the roof needs fixing. Only 37% have invested their money in a designated 529 college savings plan, though this is the highest percentage to do so since 2009. Parents who use 529 savings plans save more on average: $7,534 versus $6,043 in a general savings account. There are generational differences here as well: Millennials are the most likely to use 529s (44%), followed by Gen X (36%) and Boomers (23%).
Whatever their generation, families are feeling more motivated and confident about funding college. For the first time, more than half (52%) have a plan to pay for their children’s college costs. Millennials and Baby Boomers are slightly more likely to be planning than Gen-Xers. Further, parents who plan for these costs are more likely to save—and save more ($18,389 compared to $10,468)—and to believe having that nest egg will positively influence their student’s enrollment and persistence in college.
Most parents who aren’t currently saving feel it is important, but haven’t started yet. Half of non-savers say they intend to start saving within the next five years, but three in five cite financial constraints as the main reason they aren’t saving currently.
To reach your goal, you need to set a goal
The vast majority with a set goal (88%) believe they will reach it, too, up from 82% a year ago. Economic factors such as steadily declining unemployment combined with increasing median weekly incomes may be driving this optimism.
Most parents believe minimizing tuition costs is important. While more than half think students should help shoulder tuition costs, only half who think kids should contribute have actually discussed the issue with them—a big communication gap. The general expectation is that parents pay two-fifths and students one-fifth-plus, with the rest from loans, savings and income. Among the generations, Millennials are more likely to ask people outside the family to help foot the cost. Gen Xers expect students to share college costs; Boomers do as well, but want kids to contribute to the savings fund as well.
One area in which nearly all parents concur is the value of higher education, closely tied to better wage earning potential and the American Dream. Setting aside money for college is a higher family priority than in years past: second only behind the emergency fund. Not only do nine in 10 think their children will earn a post-secondary degree, nine in 10 with at least one child under 18 believe their offspring will go to college—and that varies little by generation. Similarly, an overwhelming majority of parents agree that college is an investment in their children’s future.