COLUMN-Making a financial stretch is key to saving for college

Mon Apr 14, 2014 8:00am EDT

(The author is a Reuters columnist. The opinions expressed are her own.)

By Liz Weston

LOS ANGELES, April 14 (Reuters) - Parents who aren't saving for college could learn a lesson or two from low-income parents who do.

A Sallie Mae study released last week found that half of parents with children under 18 haven't saved for college. The top reasons for not saving: 58 percent said they didn't have enough money to save for higher education and 22 percent said they expected their children to get enough financial aid to pay for school. The results were gathered from online interviews conducted by market research firm Ipsos Public Affairs with 2,020 parents in November and December.

The parents who hadn't saved were less likely to have a college degree (73 percent compared with 58 percent of savers) and their kids were more likely to split living arrangements between two separated parents (63 percent compared with 38 percent of savers) or live with a single parent (55 percent compared with 45 percent for savers).

But stark contrasts also emerge when comparing low-income parents who do manage to save with parents at all income levels who don't, said Sarah Ducich, Sallie Mae's senior vice president for public policy and the study's co-author.

"The difference is the value (low-income savers) place on a college education," Ducich said. "They more strongly agree with the statements that 'This is an investment in my child's future' and 'I'm willing to stretch for this.'"

The study further found that 71 percent of low-income college savers strongly agreed that college was an investment and 66 percent strongly agreed that they were willing to stretch financially to help pay for school. That compares with 51 percent and 39 percent of non-savers, respectively.

The findings echo research by economists Steven Venti of Dartmouth College and David Wise of Harvard University, who found the bulk of differences in how much households save for retirement had to do with whether they chose to save, rather than their incomes, individual circumstances or investment choices. A significant portion of high-income households save little, while a significant portion of low-income households save a lot, they noted.

Lower-income college savers reported keeping their college savings on track by committing to a monthly goal, cutting back household expenses and reducing discretionary expenses, Ducich said.

HIGHER LIVING COSTS

Still, low-income savers' ability to save may be slipping. They were less likely than middle- or higher-income savers to say they put aside as much or more money than they did the year before. The major reasons all families saving less cited were higher living costs (55 percent), unexpected expenses (51 percent) and lower earnings (47 percent).

Lower incomes also correlated with lower savings, or not saving at all. Two-thirds of low-income families say they hadn't saved, compared with about half of middle-income and one-quarter of higher-income families. The numbers are about the same as they were before the recession.

"I'm always a little bit surprised that 34 percent (of low-income parents) said they've saved money for college," Ducich said, noting that it's not easy to live on less than $35,000 in the United States.

Even those with higher incomes were likely to say they didn't have enough money to save for college, however. Sixty-nine percent of parents with incomes over $100,000 cited lack of money as either a major or minor reason they weren't saving, compared with 79 percent of middle-income families and 80 percent of low-income families.

Lower-income parents were somewhat more likely than higher-income ones to say they weren't saving because they expected financial aid to cover the costs. Sixty-four percent of those making less than $35,000 cited it as a major or minor reason for not saving, compared with 60 percent of middle-income parents and 58 percent of high-income parents.

In reality, even families in the bottom 25 percent of incomes often face significant college costs, according to figures from the National Postsecondary Student Aid Study. Grant aid typically offsets tuition and fees for the poorest families but doesn't cover other costs such as room and board or supplies, leaving the lowest-income families with an average net cost of attendance of nearly $12,000 a year in 2011-12 for a four-year, in-state public college.

Net costs were nearly $16,000 for families in the second lowest income bracket.

Interestingly, higher-income parents were far more likely than middle-income or lower-income parents to say they weren't saving because education was the child's responsibility. Twenty-one percent of parents with incomes over $100,000 cited that as the major reason they hadn't put money aside, compared with 13 percent of middle-income parents and 5 percent of low-income parents.

"Predominantly, it's considered a shared responsibility of parent and child," Ducich said. (Follow us @ReutersMoney or here; Editing by Beth Pinsker, Lauren Young and Jonathan Oatis)

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