Economy Helping More Americans Save for College

NEW YORK (MainStreet) — With the economy bouncing back and optimism on the rise, many parents finally are starting to tuck away money for their children's ever-increasing future tuition bills.

That was the finding in the recently released "How America Saves for College" annual study by Sallie Mae, which showed after post-recession declines in the proportion of families saving for college, college savings seem finally to be on the rebound.

"The recession tested family finances but parents never wavered from their commitment to help their children pay for college," said Charlie Rocha, senior vice president at Sallie Mae. "Parents today have a renewed spirit of financial optimism giving them the motivation to increase their college savings fund and get back on track towards their goals."

Previous studies saw the proportion of families saving for college decline after the recession, from 62% in 2009 to 50% in 2013. This year, the number held steady at 51%, along with the fact the average amount saved for college has increased 29% to an average of $3,398. The total average savings also increased, from $11,781 last year, to $15,346.

"The increase in savings is impressive, but one has to set it in the context of the decreases during the economic downturn," said Mark Kantrowitz, senior vice president at Edvisors Network Inc., a family of educational resource sites. "It is, perhaps, a sign of a recovering economy. If one wants to save a third of future college coats — a reasonable goal — parents of newborns born this year will need to save $250 a month from birth for an in-state public college, $400 a month for an out-of-state public college and $500 a month for a private non-profit college."

One of the reasons for the uptick in savings may be the value parents are starting to see in higher education. Nearly 90% of parents said they value education as an investment in their children's future and 80% are willing to stretch themselves financially to save for college.

Saving for college, however, does come in a distance second when discussing all saving. The study showed of a family's total savings, half was designated for retirement and one-tenth for college.

However, almost 10 percent of those surveyed said they are planning to use some of their retirement savings to help pay for their children's college.

Nearly half of parents surveyed said they have a plan for how they will pay future tuition bills — expecting to cover 40% with income and savings — while only 23% are without a plan. The most common college planning activities besides saving money include investing in the child in order to get scholarships or earn more college credits through AP classes and purchasing life insurance to help cover the cost.

"It is never too late to start saving because every dollar you save is a dollar less you'll have to borrow and every dollar you borrow will cost about two dollars by the time you repay the debt," Kantrowitz said. "It is cheaper to save than to borrow. Make saving automatic so you don't have to think to save. Set up automatic transfers from your bank account to the college savings account and increase the amount you save each year."

Kantrowitz added to beware of using whole life or cash value life insurance to save for college — as usually they benefit the insurance company more than they benefit the family — and instead focus on 529 college savings plans, which are the best because of the tax and financial aid advantages. Earnings accrue on a tax-deferred basis and are entirely tax free if used for qualified higher education expenses. Also, 34 states, plus Washington D.C., offer state income tax deductions for contributions to the state plan.

--Written by Chris Metinko for MainStreet

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