Thanks to increased savings rates and a rising stock market, average balances in U.S. college savings plans jumped 30 percent in 2013 over the prior year, according to the new "How America Saves for College" report from Sallie Mae released Thursday.
Overall savings by American families grew 7 percent in 2013 over the prior year, among the 2,000 parents with children under 18 surveyed in November and December 2013 by Sallie Mae and Ipsos Public Affairs. Still, savings lags far behind college tuition rates, which have risen exponentially in recent years.
The average published tuition and fees at U.S. public four-year colleges and universities jumped 27 percent between 2008 and 2014 (excluding inflation), and 20 percent for private, according to The College Board.
Among those who are actively saving for college, 51 percent have college savings funds of some kind, with an average balance in accounts of $15,346. The largest chunk, 45 percent, is in "general savings," while 29 percent use 529 college savings accounts, 14 percent use state prepaid tuition plans, 13 percent use educational savings accounts like Coverdells and 10 percent use bank accounts specified for minors.
More than half of families use a combination of college accounts. Another 18 percent participate in some sort of savings rewards program, like Sallie Mae's Upromise program, which coordinates with credit card spending to deposit cash back directly into savings accounts.
Some families like flexibility, and that's why they keep their savings in general accounts, say the authors of the Sallie Mae study, Sarah Ducich and Cliff Young. But that doesn't always keep the funds safe from being used for rainy days.
"They are using that general savings tactically - they have a chunk of money set aside that could be designated as college savings, but they could be using it for other things. In good times, they typically don't draw on it, but in bad times, they do," says Young.
Highs and Lows
Income disparity is a significant issue when it comes to college savings. High- and middle-income earners are far more likely to use tax-deferred savings vehicles like 529 plans, where most invest in stocks or bonds.
Lower-income respondents were more likely to keep their savings in bank accounts, and don't see much growth. Although savings rates remained constant in 2014 from 2013, the cash value of the accounts of low-income families dropped 26 percent to $3,762 from $5,093.
"Lower income families do miss out on gaining market value," if they keep their money in interest-bearing accounts, says Ducich.
One major stumbling block for wage earners at all levels is setting goals. That means they are missing out on a prime motivator for saving more, notes Mark Kantrowitz, who publishes the education resource site, Edvisors Network.
The Sallie Mae study found that only 45 percent have a set goal for what they think they need to save for college, with the average end goal of $75,563. Still, overall, only 10 percent of tuition gets paid out of savings currently. "A lot of people are intimidated and think, 'I can't pick a number,'" says Ducich from Sallie Mae.
While it's impossible to know what your exact spend will be, you can make some close assumptions, says Kantrowitz. He advises a "rule of thirds" - where one third of the cost comes from savings, one third comes from current income and financial aid and one third comes from future earnings(i.e. you take out loans for it).
That basically boils down to $250 per month per child for in-state tuition, and $500 a month for the most expensive private colleges. The problem with not saving enough, is that parents "have to choose a college based on what they can afford. Or worse, they may have difficulty saying no, and (spend more) than they can afford," says Kantrowitz.
But each family's situation is different, so you can run your own analysis using calculators available on the web at sites like finaid.org and individual college websites. Sallie Mae will be launching a new tool in several weeks that will walk parents through the process.
"The people who are saving, their predominant feeling is that they are doing a good thing. The ones who aren't are annoyed and intimidated. Getting over the hurdle to start is the worst part," says Ducich.