Families saving less for college, investing poorly

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A majority of Americans believe college is an investment in their child's future, but it's one they're not adequately preparing for.

Only 48 percent of parents are saving for their child's education, down from 51 percent last year, according to Sallie Mae's new "How America Saves for College 2015" report, which surveyed 1,988 parents with children younger than age 18. Families' average college savings balance has decreased, too, dropping 25 percent from $13,408 in 2014 to $10,040 in 2015, the lowest level in three years.

That, despite 89 percent of parents telling Sallie Mae they expect their child to attend and benefit from college and 84 percent saying they're willing to stretch financially to make that college dream a reality.

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It's not that Americans aren't prioritizing college savings, said Michael Gross, head of the higher education practice at market research firm Ipsos Public Affairs, which conducted the study in conjunction with Sallie Mae. While people tend to dedicate about 10 percent of their total savings for college, the overall pool of funds for saving toward goals, which included retirement and a new car, has dropped.

"It's a byproduct of there being less savings altogether," Gross said. "The truth of the matter is, when we ask people why they're not saving, they say, 'I just don't have the money right now.' "

Americans' college savings habits, by income

Habit
<$35K
$35-$50K
>$100K
Have saved/invested for college 41% 55% 71%
Researched financial aid 34% 29% 21%
Talked with a financial planner about college savings 12% 13% 32%
Earmarked part of every paycheck for college savings 37% 29% 32%
Work additional hours/second job to save 21% 17% 14%
Requested college savings funds in lieu of gifts 11% 12% 22%
Researched colleges for best job prospects for price 24% 17% 12%
Plan to use part of retirement savings for college 13% 13% 9%
Discussed choice of major based on job potential 26% 26% 33%
Began saving before/when child was born 9% 13% 16%
SOURCE: Sallie Mae "How America Saves for College 2015."

Families who aren't saving still expect that, come tuition time, their savings and income will cover 29 percent of the bill, according to the study. (Savers expect to cover 41 percent.) That may prove a tough goal for procrastinators to hit. "[Even] if you start saving as soon as the child is born, you only have 17 or 18 years," said Joe Clemens, a certified financial planner and founding partner of Wisdom Wealth Strategies in Denver. Versus, say, the 40-plus stretch a new college grad has until retirement.

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"At the end of the day, from a financial aid standpoint, the parents are expected to have a portion of that [college bill]," said Clemens. "So it's either pay now or pay later." But paying later could mean postponing your own retirement, or taking on debt that will linger into those golden years.

A late start is the biggest financial regret for moms of teenagers, with nearly 44 percent of the 604 moms in a recent NerdWallet.com survey saying they wished they had known to start saving for college immediately. That sentiment is shared by college graduates. A new AICPA survey found that two-thirds of the 1,010 adults had some regret about the way that they paid for their college education, in large part because they ended up depending so much on student loans. For 27 percent, their "do-over" would involve delaying starting college in order to build savings and reduce loans.

Never mind that the costs of college keep climbing. The average annual cost to attend a four-year private college was $42,419 during the 2014-15 academic year, and a public four-year college, $18,943, according to The College Board's latest report. That's up 1.6 percent and 1 percent, respectively, from the previous year.

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Mistakes aren't limited to those kicking the college-cost can down the road. About half of families are stashing their college savings in low-yield general savings and checking accounts that won't do much to grow their balance. The average annual yield on such accounts is 0.48 percent and 0.39 percent, respectively, according to Bankrate.

"Using a bank account is better than doing no savings at all," said Carina Diamond, a certified financial planner and managing director of SS&G Wealth Management in Akron, Ohio. "But unless the child is right about college age, it's probably going to be too tame. There's not going to be much growth."

Where Americans save for college, by income

College savings vehicles
<$35K
$35-$50K
>$100K
Using a 529 plan 17% 20% 49%
Average 529 plan savings $1,300 $6,561 $18,768
Using a prepaid state plan 15% 9% 16%
Average prepaid state plan savings $513 $2,405 $6,983
Using a Coverdell 13% 9% 16%
Average Coverdell savings $701 $2,735 $3,742
Using investments 15% 14% 25%
Average investment savings $1,274 $6,286 $16,796
Using a checking account 32% 22% 18%
Average checking account savings $1,206 $1,555 $6,003
Using general savings 50% 50% 43%
Average general savings $1,505 $2,831 $6,600
SOURCE: Sallie Mae "How America Saves for College 2015."

A better bet: 529 college savings plans, whose investments grow tax-deferred and can be withdrawn tax-free for the beneficiary's college costs. Many states also offer tax breaks on contributions for residents. Despite those perks, only 27 percent of college savers are using such accounts, according to Sallie Mae.

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"We hear a lot about 529 plans, but that number is pretty striking that it's as low as it is," said Rick Castellano, a spokesman for Sallie Mae. Much of the feedback from consumers is that they're unsure how the accounts work, or mistakenly believe they need a large investment to open an account. "People are just confused," he said.

To get on the right track with college savings, make a plan. It's something only 45 percent of families do, according to Sallie Mae, but the benefits are significant: Students whose families planned borrow half as much as those without a plan, and are more likely to attend college full-time in pursuit of a bachelor's degree.

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Your plan might be a dollar figure or percentage of the bill to cover, or even a regular amount to contribute, said Clemens. "The plan itself isn't important, it's the planning process," he said, likening it to dieters who change their habits by keeping a food journal. Being aware of your desire to save can help you squeeze more out of your budget and make positive behavior changes like setting up automatic contributions.

Bring your kids into the conversation, said Diamond. They should understand what you're doing to foot part of the bill and understand their own responsibilities. "Kids and parents need to be savvy consumers of where they go to college," she said. "This is a transaction. We pay money and the college gives us an education, and we have to get a return on that investment."