Although a recent national study found that one in five American families rank saving for college as their top saving priority, many families wind up making costly mistakes simply because they do not choose the best savings options.
A joint effort between Sallie Mae, the nation’s leading saving, planning and paying for education company and research specialists the Gallup organization, How America Saves for College 2010 is a study based on a nationally representative survey of 2,092 parents of children under the age of 18.
Nine out of ten American parents are planning on sending their child to college, and the study revealed that:
According to the survey, American families have saved an average of about $28,000 to pay for college. About 14 percent comes from general savings accounts or certificates of deposit while only 12 percent of that money is in 529 plans.
If you’re among Americans who aren’t quite sure what they are, 529 plans are college savings investment plans operated by a state or an educational institution. They are named after Section 529 of the Internal Revenue Service federal tax code.
There are two types of 529 plans: prepaid tuition plans and college savings plan.
Sallie Mae and Gallup found that 21 percent of families’ college savings comes from investments, but alarmingly, the largest portion of that money—23 percent—is in retirement savings.
Sallie Mae senior vice president Sarah Ducich said that finding out families are relying heavily on retirement accounts "is a little bit disturbing” and most financial experts agree.
CNN Money spoke with Mari Adam, a certified financial planner with Adam Financial Associates Inc., of Boca Raton, Florida. "I find it a little odd and disturbing, because if you’re going to save for college, there are a number of ways to do that with tax advantages. They’re probably planning on using their retirement accounts, because it’s what they have available,” Adam said.
Maria Tillotson, senior vice president of investments for Wells Fargo Advisors, agrees. “The education and the retirement are two different buckets. We would never put them together. You can borrow for college. You cannot borrow for retirement.”
The main problem with parents using their retirement accounts to pay for their children’s college education is that it triggers big tax penalties compared to other types of investment plans. Taking a loan out against a 401(k) can also be dangerous, because it has to be paid back within 5 years— or immediately if the borrower changes jobs.
The Washington Post pointed out that the percentage of families who said that the reason they are not saving money for college is that they cannot afford it rose from 62 percent last year to 68 percent this year.
According to Bill Diggins, Gallup’s lead researcher on the survey, families are “adjusting their expectations to the economic conditions, both generally and what they may be experiencing on the individual level.”
Diggins has also said “What’s remarkable is, despite all the economic problems of the past two years, parents are still optimistic about their children going to college. More and more, they prioritize college savings as much as retirement or more because they see real value in higher education.”
Despite recent economic hardships, 60% of American parents say they’re saving for their children’s college education in one way or another. On average, families have saved about $28,000 to pay for college.
Sallie Mae and Gallup found that even though low-income families saved less money than wealthy households, they still put away an average of $1,788 annually toward college. For families making less than $35,000, that represents about 8 percent of their budget – the largest percentage of any income level. Families making more than $100,000, for example, saved 2.6 percent of their income.
It’s never too late to start saving for your child’s college education.
Melissa Rhone earned her Bachelor of Music in Education from the University of Tampa. She resides in the Tampa Bay area and enjoys writing about college, pop culture, and epilepsy awareness.
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