-by Thomas Hauck
For many parents, paying for college can seem like a daunting proposition. At an average cost of $25,000 per year and rising, a student entering a four-year private institution can expect to pay a total of $115,000 by the time he or she graduates. If a child is eight years old right now and will enter college in ten years, parents need to save at least $800 a month to meet the cost of their child’s college education.
But in the current economy, many families are more worried about staying employed than saving for college. According to “The State of College Savings,” a 2008 survey of 800 parents conducted by the College Savings Foundation (CSF), parents are saving less for college and are expecting—or hoping—for substantial federal loan and grant support. While some parents have done the math and have a clear idea of what college will cost, many do not know and consequently have no clear goal in mind.
The survey reveals that having a clear goal for college savings is a good thing. Of the surveyed families, almost one-third of parents know the amount they need to save to pay for their children’s college education. Unlike the majority who admit not knowing and are far less likely to be aggressively saving,
these parents are much more likely to succeed in reaching their goals.
Families Should Start Saving Early
Many parents feel helpless about the rising cost of college. The survey found that one in four parents wants Congress and the President Obama to control college costs. It’s also likely that grandparents will increasingly shoulder some of the costs of college. In a 2008 survey of grandparents, The Hartford Financial Services Group, Inc. found that 65% of grandparents plan to contribute to the cost of their grandchildren’s college education. Twenty-two percent of parents already get help from grandparents, and during the holidays 30% ask friends and family for contributions to college rather than material gifts.
Kevin McMullen of the College Savings Foundation commented that not only do parents need a savings goal, but they should understand when, where, and why to save. Parents leave money on the table by not taking advantage of tax saving investment vehicles, while counting on free Federal money in the future that may not be there.
The 529 plan is an effective tool for savings. Twenty percent of parents who own a 529 savings plan have saved between $5,000 and $10,000 per child. How many non-529 Plan families have saved this much? Only eight percent. Seventeen percent of 529 Plan families have saved between $10,001 and $25,000 per child, while only nine percent of non-529 families have saved this much. Over half of parents without a 529 Plan have saved nothing.
The 529 Plan offers tax savings, but there are fees involved. According the U.S. Securities and Exchange Commission, earnings in 529 Plans are not subject to federal tax, nor and in most cases state tax, so long withdrawals are used for eligible college expenses including tuition and room and board. Many states offer other benefits, including matching grants, for savers who invest in 529 accounts.
The fees and expenses associated with your 529 Plan may lower your returns. Prepaid tuition plans typically charge administrative and enrollment fees. College savings plans may charge annual maintenance fees, enrollment fees, and asset management fees, and “loads” for broker-sold plans.
The best advice? Start saving early for college, and when in doubt consult a qualified college planning specialist.