As college costs rise in US, parents fall short of saving goals

NEW YORK Tue Feb 26, 2013 12:00am EST

NEW YORK Feb 26 (Reuters) - With rising U.S. college costs and too many options, parents are saving less than they expected for their children's higher education.

American families are failing to reach their educational goals as short-term budget needs and emergency savings take priority in the household budget, according to "How America Saves for College," a closely watched study released Tuesday from the education lender Sallie Mae.

Families said they are relying on federal and private student loans to fund college costs, according to the study, which polled 1,600 households in August 2012.

Families currently saving for college expect to sock away an average $38,953 by the time their child is ready to enter school. But according to their savings behavior, families will probably only save an estimated $19,784, about half of their goal, according to Sallie Mae. (Sallie Mae estimates the cost of private four-year college to be $203,114 five years from now.)

The annual estimated cost of tuition, room and board for college jumped by 84 percent at four-year public institutions between 2000 and 2010, to $15,918. Costs for private institutions rose 49 percent to $32,617 during the same period, according to the National Center for Education Statistics.

Parents have limited knowledge about financial instruments such as 529 plans and Coverdell education savings accounts, which produce tax-free earnings as long as withdrawals are used for qualified education expenses. Of those polled in the study, 55 percent said they had never heard of 529 savings plans.

Sallie Mae, which administers 529 plans in 16 states, says parents are more likely to use general savings accounts or even their retirement plans instead of tax-advantaged government sponsored plans to save for college.

Even so, personal savings have declined in the years following the recession, dropping to 3.7 percent in the third quarter of 2012 from 5.1 percent in 2010, according to the Bureau of Economic Analysis. This means that the large number of families - 68 percent - who consider higher education to be a valuable investment for their kids are relying on reduced savings to put their children through school.

In the last academic year, 61 percent of students received one or more grants or scholarships that covered 29 percent of total college costs. The remainder was paid with savings and loans taken out by students and parents, Sallie Mae said.

As the Consumer Financial Protection Bureau looks into the repayment landscape among the nation's private student loans, transparency is a top priority in Washington.

Sallie Mae, the largest student lender in the United States, encourages families to start making interest payments in school to prevent loans from growing larger after graduation. Half of the families surveyed are currently taking this advice.

"We don't want any surprises," says Sarah Ducich, senior vice president of public policy for Sallie Mae. "Surprised borrowers are not good for us."

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