As college tuitions continue to rise, a recent study found that parents aren’t taking advantage of college savings tools to help fund their children’s educations. Fidelity’s 2021 College Savings and Student Debt Study says that fewer than one in five high school parents expect to use dedicated college savings accounts. And almost half of all parents surveyed anticipate that grants and scholarships will play a role in financing their children’s education. Only a third said they will use general savings to pay for a portion of tuition.
A financial advisor can integrate college savings into an overall financial plan. In fact, the Fidelity’s study found that parents who work with a financial advisor are more likely to start saving for education than those without one.
How Parents Plan to Pay for College
The online survey, conducted by Engine Insights in late May and early June, gathered responses from 4,004 high school students, recent college graduates, high school parents and parents of recent college graduates.
Only 19% of high school parents said that they plan to use dedicated college savings accounts like 529 plans to pay for college. More parents expect to rely on grants and scholarships, financial aid and student loans. Here’s a closer look at how high school parents expect to pay for their children’s college educations:
How High School Parents Will Pay for Higher Education Funding Sources Percentage of Parents Grants and Scholarships 49% Financial Aid 44% Student Loans 35% General Savings 33% Parents’ Income During Attendance 25% Child’s Income During Attendance 20% Dedicated College Savings Accounts (e.g. 529 Plans) 19%
Meanwhile, the survey found that 83% of parents who work with a financial advisor have started saving for their child’s education, while only 50% of parents without a financial advisor have begun saving. What’s more, 27% of parents with a financial advisor use or have used a dedicated college savings account compared to only 11% who don’t have an advisor.
The study also revealed a disconnect between people’s expectation of tuition price tags and how much college actually costs. On average, high school parents estimate one year of college will cost $22,200, well below the $26,800 it costs for one year of in-state tuition at a four-year public school and the $54,800 it costs for one year at a private four-year institution, according to College Board estimates from 2020. In fact, one quarter of high school parents believe one year of college will cost only $5,000, while 38% of school students hold the same belief.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings vehicle designed to help parents save for their children’s higher education needs. Contributions to these professionally managed investment accounts grow tax-free and can be withdrawn free of tax to pay for a variety of education-related expenses, including:
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Tuition and mandatory fees at eligible institutions
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Books and school supplies required for enrollment
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Electronic equipment like printers, computers, software and internet access required for enrollment
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On-campus room and board paid directly to the school for students enrolled at least half-time
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Off-campus rent if it doesn’t exceed the estimated costs of on-campus housing set by the school for students enrolled at least half-time
Every state offers at least one 529 plan, and you don’t need to live in a particular state to invest in one of its plans. However, some states allow their residents to make tax-deductible contributions or receive tax credits.
It’s important to remember that these savings accounts are designed specifically for higher education needs. Using money saved in a 529 plan on nonqualified expenses will trigger income taxes and a 10% penalty. However, up to $10,000 can be used each year to pay tuition at K-12 institutions.
Bottom Line
While 529 plans can be an effective strategy to save for a child’s college education, less than 20% of high school parents surveyed for a recent Fidelity study said they use them. And with tuition still rising, the study also found that many high school students and their parents underestimate just how much college will cost. However, parents with a financial advisor are more likely to saving for their child’s college tuition than those without an advisor.
Education Savings Tips
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Regularly contributing to a 529 plan is a tax-advantaged strategy to save for future education expenses. However, you should familiarize yourself with the different tax rules, including federal gift taxes.
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A financial advisor can help you create a plan to save for your child’s college education. SmartAsset’s free matching tool will pair you with three advisors in your area in as a little as five minutes. If you’re ready to find a local advisor, get started now.
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