Families Saving More for College but Underestimating Costs: Fidelity

October 12, 2017 at 09:28 AM
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An increasing number of families are saving for their kids' college education, but many are likely not saving nearly enough, according to Fidelity Investments' latest College Savings IQ survey of almost 2,000 parents nationwide.

A record 72% have opened college savings accounts, but many families are underestimating the cost of college.

Parents of high schoolers, for example, are expecting a four-year nonprofit private college education will cost $145,000 on average when the projected sticker price is close to $220,000. Of course, not all families will pay the sticker price.

"The good news is the percentage of parents saving for college are at a record high 72%, 59% are saving regularly and an increasing number are using dedicated savings vehicles like 529," said Ron Hazel, senior director of Fidelity Advisor 529 and individual retirement products. "The not-so-good news is that a significant number are underestimating what college will cost."

Almost half the parents saving for college are using 529 college savings plans, which have several tax advantages. Earnings grow tax free and distributions are tax-free so long as the funds are used for qualified educational expenses such as tuition and fees. In addition, some states allow tax-deductible contributions to 529 plans, even for plans based out of state.

Parents saving for college with a 529 plan reported an average balance of $32,000 saved, almost 50% more than parents saving without a 529 plan. Parents working with a financial advisor also reported saving more for college than those who didn't have an advisor — $14,000 more, according to the Fidelity survey.

The firm itself said it has seen a 34% increase in openings for its 529 college savings plan accounts through the first half of 2017 compared to the same time frame last year. (Fidelity sponsors five 529 plans — four direct-sold and one sold through advisors.)

Many parents who have set up 529 plans, however, don't have a clear understanding of plan fundamentals, said Hazel. Many don't know that 529 savings can be used to pay for more than just tuition and fees — they can be used to pay for books and room and board, for example — or that a beneficiary can be changed at any time and investments within a plan can also be changed.

More important, many parents — 44% in the Fidelity survey — believe that savings, including those in a 529 plan, will significantly reduce the chances of their student receiving financial aid. The impact, however, is often minimal. Assets held in a 529 plan owned by a dependent student or his or her parents, for example, have a weighting of just 5.64% in the Expected Family Contribution calculation used in the Free Application for Federal Student Aid (FAFSA).

The survey found that parents expect to cover 51% of their children's college costs with savings and loans with the remainder split between scholarships and loans their children take out. Thirty-seven percent of parents of high schoolers and 68% of parents of preschoolers and younger children reported that they're still paying off their student loans.

The average family income of parents participating in the Fidelity survey is $103,000, including $118,000 average for those working with an advisor and $92,000 for those who aren't. 

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