College Savings in Massachusetts at an All-Time High, Yet Families Underestimating Future College Costs

College savings knowledge gaps can hold MA families back from maximizing 529 plan benefits; 72% still unaware of new state tax deduction available to U.Fund College Investing Plan savers

BOSTON — Massachusetts families are saving for college at an all-time high 74 percent, however, according to findings from the new College Savings IQ survey conducted by Fidelity Investments® and the Massachusetts Educational Financing Authority (MEFA), many parents could benefit from additional education when it comes to savings and planning best practices.

The survey identified knowledge gaps in three categories: 1) the future cost of college and how much they should be saving; 2) how saving for college impacts future financial aid eligibility; and 3) greater awareness of the fundamentals of 529 college savings plans–most notably for Massachusetts parents, that the Commonwealth now offers an annual tax deduction for those contributing to the U.Fund College Investing Plan, the Massachusetts 529 plan.

Parents Committed to Reducing Student Debt, but Underestimate College Costs

While college savers appreciate higher education as an investment in the future, many parents may be dramatically underestimating the sticker price associated with earning a degree, based on current average costs and rates of college inflation. When asked what they expect the four-year cost of college will be by the time their child heads to campus (before any financial aid, scholarships or other discounts), parents of preschoolers across the country fell short by an eye-opening average of $110,000, according to the current pace of college inflation.1 Even parents with high school students, who should be most likely to have a handle on what to expect, were significantly off the mark, underestimating the potential sticker price of a four-year degree, by an average of $70,000.

Estimating future college costs is not the only area where parents need more guidance. In Massachusetts, nearly half (47 percent) of parents admit they do not have a good idea regarding exactly how much they should be saving each month.

"Pinpointing how much you should save can feel like a moving target—especially when your kids are young and college goals for your child's education may be more undefined," says Keith Bernhardt, vice president of college planning at Fidelity. "But the key is to get started. Set a reasonable goal to start building your college fund, and then take advantage of free and simple to use tools available online to refine your savings goals over time."

This uncertainty is not hindering parents' motivation to save and ultimately reduce the potential student loan debt their children may face down the road. Eight-in-10 parents cite concern for their child taking on significant debt as a factor motivating them to save more. Just how much debt do they worry their kids will carry? Eighty-nine percent of parents expect their child to graduate with debt, estimating an average of $58,000 in student loans.

Furthermore, many parents are looking to reduce the financial burden their children will face. In fact, many Massachusetts parents intend to bear the brunt of college expenses, planning to cover 53 percent of college costs with their own savings and parental loans. They also expect their child to take on approximately an average of 22 percent of the expenses and estimate another 18 percent will be covered by scholarships.

For many parents nationwide, this commitment may be influenced by their own experience managing debt. Thirty-seven percent of parents with kids in high school report they are still paying down their own student loans; that percentage skyrockets to 68 percent for parents of kids in preschool or younger.

To help do their part, more than half (52 percent) of Massachusetts parents saving for college are doing so in a tax-advantaged 529 plan. Nearly nine-in-ten (89 percent) believe that saving in a dedicated college account helps keep them on track as they work toward their college goals.

Opportunity to Build Greater Awareness of 529 College Savings Plan Benefits

While familiarity with 529 plans continues to grow (76 percent say they are very/somewhat familiar), many Massachusetts parents remain unclear on the basics of these accounts, and therefore may be missing out on certain benefits and failing to maximize their savings potential. When asked questions specific to college savings plans, many showed a critical lack of understanding around key 529 plan attributes including:

  • Account owners can change a plan's beneficiary at any time
  • 529 savings can be used to pay for more than just tuition and school fees
  • Account owners have the ability to adjust the investments within their 529 plan portfolio after opening
  • Options for 529 savings if the beneficiary doesn't need all funds to pay for college
  • Whether Massachusetts offers a tax deduction or credit for contributions to college savings

Of particular note in Massachusetts, 72 percent of parents were not aware of the new state tax deduction available to parents saving in a U.Fund College Investing account. Among these parents, 64 percent said they'd be likely to save more for college if they knew the state offered this benefit.

"Many parents are still unaware that Massachusetts offers a new state tax deduction available to parents saving in U.Fund College Investing Plan, therefore missing out on a valuable college saving benefit," said Tom Graf Executive Director of MEFA. "Massachusetts parents have always shown a strong commitment to saving for higher education, and MEFA's goal is to help them take advantage of every opportunity to grow their savings and leverage 529 college savings plan benefits move them closer to achieving their goals."

While there's a clear need to raise awareness of the new state tax deduction for college savings, many new families are now taking advantage. Fidelity's customer data shows a 64 percent increase in new U.Fund College Investing Plan accounts openings through the first half of 2017, compared to the same time last year.

Parents Need More Insight into How (Little) Saving Affects Financial Aid

The third category that caused confusion among parents is recognizing that saving for college has only a small impact on financial aid eligibility. One of the most popular myths associated with college savings is that saving too much will significantly hurt a family's chances for financial aid. Four-in-ten parents (41 percent) believe that how much they have saved for college will eliminate their opportunity to be offered future aid.

In truth, only a small percentage of 529 plan assets (or savings in general), up to 5.6 percent, are included in a family's Expected Family Contribution (EFC), as determined by the federal financial aid formula. And yet, when asked how much of their total 529 savings they would be expected to contribute per year of college, 97 percent of Massachusetts parents either significantly overestimated or couldn't answer, illustrating a critical lack of knowledge of how 529 savings are considered in the financial aid evaluation process.

For more on how 529 savings are evaluated as part of the financial aid process, and other questions and answers from the new survey, see Fidelity's College Savings Study Guide and www.mefa.org for more information.

How to Close the Knowledge Gaps and Strengthen College Savings

While parents in the Commonwealth may earn high marks for their commitment to saving, taking action now to learn more about college costs and how to plan for them can help ensure families reach their college goals. Fidelity recommends three steps to better prepare:

  • Map Out Your Savings Journey: Parents with a financial plan in place are more than twice as likely to feel they have a good idea of how much they need to save in comparison to those without. Those with a plan are also more likely to save regularly (71 percent vs. 30 percent) and on average report having saved substantially more than those without a financial plan ($82k vs. $17k).
  • Consider Reaching Out to a Financial Professional: Forty-one percent of Massachusetts parents report they are saving for college and working with a professional to help reach their goals, with a majority citing this guidance as helping them stay on track with saving. What's more, many parents struggle to juggle numerous savings priorities, leading 29 percent to either stop or reduce savings for retirement in order to save for college. With the help of professional guidance from a source such as Fidelity's college planning specialists, parents can prioritize their financial needs based on their family's unique situation.
  • Find More Opportunities to Boost Your College Savings Nest Egg: Savings can truly be a family affair, as previous Fidelity research has found that 88 percent of grandparents in Massachusetts would contribute to a college fund if asked , yet only 21 percent of parents have actually inquired. With the holidays upcoming, this can be a perfect time to share college goals and encourage gifts to college savings. To make contributing easy, Fidelity offers a 529 Online Gifting Service , which lets U.Fund account owners use email and social media to encourage friends and family to gift. For additional ways to jump start savings, see this Calendar of College Savings Strategies .

MEFA and Fidelity offer complimentary college saving and financing guidance provided by dedicated representatives who are available to answer questions regarding savings options, including how to open a U.Fund College Investing Plan account. Parents can take advantage of college planning guidance at Fidelity's nine investor centers across Massachusetts, by calling 800-544-2776, or visiting www.fidelity.com/ufund.

At www.mefa.org, MEFA provides free, expert guidance on planning, saving and paying for college, as well as links to career planning and financial aid resources. In addition, MEFA's community outreach includes more than 500 webinars and seminars annually led by financial aid specialists across Massachusetts.

Fidelity's College Savings Learning Center provides a library of online resources for parents, including video courses on saving account options and strategies, additional calculators and other tools and resources on supplementary ways to pay for college, such as how to apply for financial aid and scholarships. Additional Viewpoints articles provide a range of insights on college topics including: Are your college savings on track? , The ABCs of 529 college savings plans and 3 "must know" college financial aid tips .

About the College Savings IQ Survey

As part of the study, Fidelity conducted a survey of parents with college-bound children of all ages. Parents provided data on their 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. Data was collected by Boston Research Technologies, an independent research firm, through an online survey from July 26–August 22, 2017, of 1,984 parents nationwide with children aged 18 and younger who are expected to attend college. The survey respondents had household incomes of $30,000 a year or more, and were the financial decision makers in their household. College costs were sourced from the College Board's Trends in College Pricing 2016. The results of the Fidelity College Savings IQ may not be representative of all parents and students meeting the same criteria as those surveyed for this study.

About Fidelity Investments

Fidelity's goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.6 trillion, including managed assets of $2.1 trillion as of July 31, 2016, we focus on meeting the unique needs of a diverse set of customers: helping more than 25 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with investment and technology solutions to invest their own clients' money. Privately held for nearly 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.

About The Massachusetts Educational Financing Authority (MEFA)

MEFA is a not-for-profit state authority, not reliant on state or federal appropriations, established under Massachusetts General Laws, Chapter 15C. MEFA's mission, since its founding in 1982, has been to help Massachusetts students and families access and afford higher education and reach financial goals through education programs, tax-advantaged savings plans, low-cost loans, and expert guidance. Recently, MEFA's mission has been enriched through its statutory designation to establish and administer the ABLE Savings Plan, created to help individuals with disabilities save for disability-related expenses. The Attainable Savings Plan is a program of MEFA and administered by Fidelity Investments.For more information, visit www.mefa.org to learn more or follow MEFA on Twitter @mefatweets and on Facebook at mefaMA.

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