How Millennials Hope to Spare Their Kids Student Debt
More parents are saving for their kids' college education and are getting more disciplined about it—but they're still not saving enough to help their kids as much as they hope to, a new study has found.
Today's parents, many of whom have grappled with their own student debt, hope to foot more of the bill for their college-bound kids—about 70 percent of it, up from 57 percent four years ago, according to the annual college savings study that Fidelity Investments released Thursday. Forty-three percent hope to cover all college costs.
Problem is, at the level they're saving, those parents aren't on track to help their kids like they want to, according to Fidelity.
Fidelity surveyed a national sample of 2,196 families with children who are 18 years and younger and whose parents expect them to go to college. The average household income was $97,700; 71 percent of all the parents had graduated from college.
The survey—which used a "proprietary asset-liability modeling engine" 1 to compute how close parents were to meeting that 70 percent bogey—found that, overall, parents are on track to cover just 29 percent of college costs by the time their child heads to school.
The good news in that sober figure, relatively speaking: It's up from 27 percent a year ago.
Fidelity also noted that 52 percent of parents said that when they look back 10 years, they think they could have saved more. Half of those who said they could have saved more pegged the amount at $50 or more per month; 26 percent said $250 or more a month. The median answer was $200 a month.
Since personal finance gospel is to start saving as early as possible and let that money grow, Fidelity ran the numbers on what those additional savings could have added up to over time. 2 It estimates that the $50-per-month camp could have accumulated another $8,200 in 10 years and $19,400 over 18 years. If a family had saved an extra $200 a month for 10 years, its savings could have swelled by $32,776 and grow to $77,500 over 18 years. (Fidelity used a 6 percent annual rate of return; the additional savings amount is not inflation-adjusted.) 3
When each generation is broken down by how much of their kids' college its members plan to pay for, the millennial generation has the largest share of parents—52 percent—who want to cover all the costs.
That makes sense: They may still be paying off their own student debt and know what a burden those loans can be. And since they're young and have more time to save, they can be more optimistic than members of older generations about meeting their goals. Of Gen Xers, 38 percent said they plan to cover all college costs; 26 percent of baby boomers said the same.
Millennials were probably a big component, then, of the 58 percent of all respondents who want their kids to graduate with no debt. When asked how much debt they thought acceptable for their child to have on graduating, millennial parents gave the lowest amount—$19,800.
Even as the share of college costs that parents say they want to cover has risen steadily since 2012, parents are seriously contemplating how to reduce college costs—whether by having their kids live at home while in school or graduate in fewer semesters (a nice thought, that). Three-quarters of parents said they are thinking about having a nonworking spouse return to work or having a child work while in school.
More parents are also using college tax-advantaged 529 savings plans. Forty-one percent of families surveyed invested in a 529 plan; the same percentage works with a financial professional. And nearly two-thirds of parents said they have a financial plan that's helping them with college savings, up from 62 percent last year.
That plan might also be getting them to focus on retirement savings, since 27 percent of parents named that as their No. 1 savings priority. (College followed at 21 percent.) A recent survey by T. Rowe Price of 1,086 households, however, found that 75 percent of the parents of children age 8 to 14 were willing to postpone retirement to pay for their kids' college.
In the Fidelity survey, even though parents have gotten better at saving for college, they still said they wish they'd done more. Asked what they wish they'd done a decade ago, nearly a quarter said "opened a 529 college savings account earlier," closely followed by "treated savings for college like a bill to myself."
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Those surveyed shared data on "current and projected household asset levels including college savings, use of an investment advisor and general expectations and attitudes toward financing their children's college education," the study said. "Using Fidelity's proprietary asset-liability modeling engine, the company was able to calculate future college savings levels per household against anticipated college costs."
You can run a simple calculation on your own on this Fidelity calculator.
The study did not say just how much closer that additional savings would have brought parents to their goal.