Americans are more likely to use loans than specialized college-savings plans to pay rising tuition costs.
“Middle- and higher-income families, for the most part, are leveraging themselves more than in the previous two years,” states the 2010 How America Pays for College by Sallie Mae and Gallup.
The percentage of families who borrowed to save for college rose from 42 percent last year to 46 percent in 2010. Only 15 percent of the families used a college savings fund, such as a 529 plan, to pay for college. Six percent withdrew month from retirement savings and 14 percent withdrew money from other savings plans.
Seven percent of parents have taken out federally-subsidized loans, while 6 percent are using credit cards to help pay for college. Four percent used private education loans, another 4 percent borrowed on the equity of their home, 3 percent borrowed on their retirement accounts and 2 percent found other loans.
“This kind of data shows the importance of financial planning,” said Catherine McBreen, managing director of Spectrem Group, a market research firm specializing in affluent investors. “Families who wait for the last minute to think about paying for college miss out the many financial advantages of college savings plans.”
These advantages include tax-free growth. Monthly payment plans and automatic contributions make it easy for families to begin saving for college when children are young. The plans also help families avoid the high costs of borrowing.
Wealthier families are more likely to invest in college savings plans, Spectrem research shows. Surveys conducted in December 2010 show than 28 percent of the wealthiest Americans invest in 529 plans with an average balance of $71,300. The Ultra High Net Worth Investor has a net worth of $5 million to $25 million, not including primary residence.
“Millionaires are sophisticated investors,” McBreen said. “They enjoy investing and like to be actively involved. What they don’t know they find out from financial advisors.
Twenty percent of millionaires with a net worth of $1 million to $5 million NIPR have 529 plans with an average balance of $43.24, while 9 percent of the Mass Affluent have 529s with an average balance of $16,500. The Mass Affluent have a net worth of $100,000 to $1 million NIPR.
More parents are expressing extreme concern about rising college costs as well as the job prospects for their children, but they continue to feel college is an important investment in the future. The average cost of tuition at a public college is up 4.6 percent to $8,535 this year, while tuition costs for private colleges is an average of 3.9 percent to $9,700, reports the College Board. Costs for room and board, books and fees are also rising. The average total costs for a private four-year institution is just under $3,700 a year.
“Drawing upon both personal and borrowed resources at higher levels, families demonstrate that they are willing to increase their investment in a college education at a time when fiscal uncertainty and austerity are prevalent,” the report says. It’s the third annual study conducted by Sallie Mae and Gallup to examine how families of 18-to-24-year old undergraduates are paying for college.
In addition to borrowing money for tuition, nearly all families report taking at least one measure to save money, such as reducing spending or working more hours.
“This year’s families report that they are facing rapidly escalating college costs, are reaching across all funding sources to meet those additional costs, and are very worried about future tuition increases,” the report says. “At the same time, high majorities of families strongly agree that a college degree is more important now than in the past.”
The families report that costs of attending college have increased 17 percent from last year and 28 percent from two years ago. Families are meeting these additional costs by drawing more from nearly all sources of funding. Parents shoulder nearly half the costs, using income and savings to cover 37 percent of the bill and borrowing to pay another 10 percent. Grants and scholarships continue to be the second most important source of funding, and make up an average of 23 percent of costs. Students take out loans to cover 14 percent of the bill, and work and save to pay for 9 percent of college costs. Friends and family cover 7 percent of the bill.