Parents are helping their kids save for college more
About three-quarters of families reported relying on parent income and savings to cover the cost of the last academic year — with parents contributing an average of $14,282, reports Sallie Mae.
Higher-income households making $150,000 or more were even more likely to have their parents help out (91%), although 63% of families earning less than $50,000 also had support from the bank of mom and dad.
As a result, parents are opening up a growing number of 529 savings plans — tax-advantaged savings accounts earmarked for higher education — and squirreling away funds to help pay for their kids’ schooling.
As of June 2023, there were 16.25 million of these accounts open nationwide — a 40% jump from 2013, according to the College Savings Plan Network.
However, tuition prices are much higher for students today compared to many older Americans.
Between 1980 and 2023, the average price of college tuition, fees and room and board have surged by 155%, CBS News reports, citing data from the National Center for Education Statistics.
And the Sallie Mae report shows families spent an average total of $28,409 on college for the 2023-24 academic year — a 12% increase ($25,313) from 2021-22.
“The college costs can be astronomical,” Ward said. “That's not a new conversation. That's a conversation we've been having for the last 25 years because college inflation has been at a higher pace than regular inflation.”
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Explore better ratesWhy it's better to start saving early
Sallie Mae research shows that parents are getting a headstart on planning, with nearly six in 10 families formulating a plan to pay for all years of college before the student even enrolled — a 15% jump compared to five years ago.
Saving for college tuition as early as possible can provide an edge in terms of compounding.
“I started saving before my children were born,” Mark Kantrowitz, an expert on student financial aid, scholarships and loans, told Moneywise.
However, he notes it’s never too late to start saving, even if it’s just $5 a month. Several states offer income tax deductions if you contribute to a 529 savings plan as well.
“It’s cheaper to save than to borrow,” he advised, noting that parents taking out loans for their kids’ education today could end up draining their retirement savings to pay them off in the future. “So, the more you save, the less you’ll need to borrow.”
Sallie Mae reports the bulk of parental contributions came from parent income and college savings funds, however some families reported making withdrawals from retirement savings accounts as well.
As a CFP, Ward advises parents to prioritize financial planning for their retirement, potential medical expenses and long-term care first
If you don’t have a decent nest egg to cover your projected costs in retirement, you might want to pump the brakes on helping the kids with college, she says.
“We have to hold up a mirror to [the parents’] situation. And we say if you pay for college, this is when you run out of money for yourself.”
Ward believes it’s important to have open conversations with your children and get them involved in the financial planning for their education. For example, if you’re not covering the full costs for their education, the kids can consider getting a summer job or working while attending college to fill the gap.
Don’t forget to consider the possibility your child might not actually attend college at all. With a 529 plan, it can either be liquidated with penalties and taxes or it can be transferred to a relative of the child for their own college costs.
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