Most parents believe saving for college is important, but many regret not saving more, according to a survey from Student Loan Hero.
The study found 40% of parents surveyed were still paying off their own student loans, suggesting they're concerned about keeping their own children out of debt. And although parents may have paid their own way through college – 43% didn’t receive any help from their own parents – many still assume responsibility for their kid’s expenses.
How parents are saving for college
Every dollar saved for college is one less that the child will have to borrow. Yet although 529 savings plans offer tax-free investment growth, which can potentially boost your savings, only 26% of parents saving for college are using one. Instead, the majority (74%) are using a regular savings account, which offers very little (if any) potential growth.
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Parents may be hesitant to use a 529 plan because they’re afraid of what will happen to their savings if their child decides not to go to college. The truth is, you can use the money from your 529 plan for anything, at any time. However, if you withdraw the funds for something other than qualified education expenses (think: tuition, books, room and board, computers), you will have to pay income tax as well as a 10% penalty on the earnings portion of the withdrawal. Your contributions (the money you put in) will never be taxed or penalized.
The survey also revealed that parents plan to borrow to help pay for their children’s college education. Federal loans were the most popular tool (52%), followed by private student loans (43%) and personal loans (29%). Some parents (32%) plan to use a Parent PLUS Loan, which is a federal loan taken out in a parent’s name that may include additional fees on top of interest payments. Others plan to use credit cards (16%) to pay for college, perhaps to take advantage of rewards programs or other incentives.
Are parents assuming too much responsibility?
Saving for college is an important goal for families, but is it really more important than securing your retirement? According to the study, 37% of parents say yes. What’s more, 37% have thought about tapping their 401(k) or IRA funds to help pay for college, and 18% might consider it. It’s important to understand the consequences before taking an early withdrawal from a qualified retirement account. Not only will you be subject to a 10% penalty fee, but you’ll also miss out on years of potential tax-deferred growth.
Parents feel guilty about not saving enough
The study revealed that while 48% of parents were happy about how much they have saved for college, 44% wish they saved more. The key is to start early, and if possible, save often in a 529 plan. Even parents with the best intentions can get off track, which is why many choose to set up automatic monthly contributions to a linked bank account. This “set it and forget it” method will help you stay on top of your goal with minimal effort. If there’s no room for monthly deposits in your budget, just try to contribute whenever you can. Each day you wait to start saving you’re potentially missing out on tax-free earnings growth. When shopping for a 529 plan, be sure to explore top-rated options with low fees and strong historical investment performance.