Middle-Class Families Shrink Their College Fund Contributions

The share of middle-class families saving for college dropped below 50 percent for the first time in five years

Fewer parents are finding the money to save for their kids' college. And those who are saving, are saving less. After a 30 percent jump in the level of average savings for 2013, the day-to-day cost of living, combined with lower earnings and unexpected expenses, helped push the amount parents have saved for their kids' college down 25 percent in 2014, according to a new survey. The average savings level of $10,040 is the lowest in three years. 

Parents still value college as much as ever, according to a report released on Wednesday by Sallie Mae. Many still couldn't match 2013's savings. The share of middle-class families that saved for college dropped to 46 percent, from 51 percent, the first time in the survey's five-year history that it fell below 50 percent. Among the income groups broken out, middle-class households also had the highest share saying they'd cut back on household expenses to add to savings in the past year, at 27 percent. (Middle-class families are defined in the survey as having between $35,000 and $100,000 in income.) 

On a more positive note, single-parent families are saving a surprising amount, and even saving more than multiparent families. Single parents have put away an average $11,868 for their children's college costs, compared with $10,341 for parents who live together.  

When choosing how to save, about half of all families rely on basic savings accounts, which, as anyone with a savings account knows, yield next to nothing. And 32 percent of lower-income families use checking accounts. These are dangerous places for would-be savers to plunk money, because they're easy to tap.

A tax-advantaged 529 college savings account invested largely in equities—depending on how far off college payments are—could be a better way to save. In the 2014 survey, which looked back on a year when the Standard & Poor's 500 Index rose about 27 percent, Sallie Mae says the 30 percent increase in the average amount saved for college was driven by gains for middle- and high-income families in the value of those savings. The S&P 500 gain college savers looked back on in this year's survey was about 11 percent.

Households making $100,000 or more, which are the top income group broken out in the survey, are big users of 529s. Just under 50 percent use them, up from 45 percent in the prior year's survey. The average amount saved in them: almost $19,000, up from $16,500 last year. The far lower use of 529 plans among lower- and middle-income families may be due in part to confusion. In the survey, many people thought they wouldn't have enough money to start an account or just didn't understand how they worked, says Rich Castellano, Sallie Mae's vice president of corporate communications.

The plans, which do have complicated rules, allow earnings to grow tax-free, and investment earnings aren't taxed as long as they're used for educational expenses. Fees on the plans have been falling, and some states, such as Louisiana, offer subsidies that mean there is no fee at all on a basic plan for residents.

While lower college savings are bad news, there was some good news in the survey. People are improving their savings habits, with more using direct deposit to save, more setting aside money each pay period, and more putting part of a tax refund toward college savings. If incomes continue to rise, more people may be primed to save.  

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