5 lessons on saving for college

Learn how parents can take steps to boost their readiness for college bills.

  • College Planning
  • 529 Plan
  • UGMA/UTMA
  • College Planning
  • 529 Plan
  • UGMA/UTMA
  • College Planning
  • 529 Plan
  • UGMA/UTMA
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Key takeaways

  • Start saving early in a 529 college savings account.
  • Make a solid plan for college savings.
  • Treat college savings like a monthly bill and try to increase the amount you put toward it over time.
  • Talk to kids early about expectations around their contributions to college expenses.
  • Consider getting help.

As parents, you encourage your children to learn from their mistakes. When it comes to college savings, learning from other parents' missteps or oversights can be a great untapped resource.

As college costs continue to rise, many parents are trying to save more. In 2018, 7 out of 10 parents surveyed say that they are currently saving for college, according to the latest Fidelity College Savings Indicator Study.1 That's a big increase over the 2007 number, when only half of the parents surveyed reported saving for college—though it's essentially flat compared to 2016, the last time the survey was done.

But fewer parents these days think they will be able to cover the entire cost of college. Just 2 years ago, 43% of parents planned to foot the entire bill, versus just 29% in the 2018 survey.

With rising college costs comes rising debt for many students and their parents. The average 2017 college graduate who took out loans graduated with a little more than $39,000 in student loan debt.

Still, more parents are willing to make additional sacrifices and expect to pay more—as evidenced by the increased number of parents who say they’re saving for college in Fidelity’s College Savings Indicator Study. "Today's parents have learned from their own experiences paying for college and managing student loan debt. These parents clearly value the importance of a college degree and likely want to help shield their children from a heavy student debt burden after college," says Melissa Ridolfi, vice president of retirement and college leadership at Fidelity.

Here are 5 college savings tips from the latest Fidelity College Savings Indicator Study.

1. Consider a 529 savings plan early

It's hard to make decisions when you don't understand your options. Half of parents surveyed said they don't know the best accounts for college savings and weren't sure how much to save each month.

While there are several types of accounts for college savings, the benefits of a tax-advantaged 529 savings plan are striking. Money invested in a 529 plan can grow tax-free and be withdrawn tax-free for qualified education expenses at accredited institutions, which includes colleges, universities, vocational schools, and trade schools. Money in a 529 account can also be used to pay for expenses associated with graduate school—and can even be used for up to $10,000 per year per beneficiary for elementary or high school tuition expenses.2

Read Viewpoints on Fidelity.com: The ABCs of 529 savings plans

2. Make a solid plan for college savings

Fidelity's survey revealed that 56% of families have a financial plan in place to help reach their college saving goals. Planning ahead is one of the keys to saving and investing successfully for a big goal—it takes a long time for your savings to build and for earnings to compound.

Starting to save for college as early as possible can make a difference, because you'll have time to save more money and more time for your money to potentially grow.

For example, 2 different families have a goal to save enough to cover at least half of the average cost of 4 years at a public university by the time their child graduates from college. According to Fidelity's college calculator:3

  • Family A starts saving when their child is 12 years old, giving them about 10 years to save. They will need to save $390 per month to reach their goal.
  • On the other hand, Family B starts saving when their child is born, giving them about 22 years to save. With the same return assumptions as Family A, Family B needs to save half as much per month—just $190—to reach the same savings goal.

While it's always preferable to save as soon as possible, a late start is better than never starting at all.

As you watch your kids grow up and get ready to leave the nest, remember that staying invested appropriately is key. One of the features of 529 plans is the option to choose an age-based investment option which automatically shifts your investment mix from more aggressive to more conservative as your child approaches college age. That can help manage potential adverse effects of a market downturn just when those tuition bills start to hit your inbox.

3. Treat college savings like a monthly bill

Even though your kids might not be off to college yet, think about your college savings fund as a bill to pay—the real tuition bills will hit your inbox soon enough. Sure, you already have a lot of daily living expenses like rent or mortgage payments, food, and entertainment, and contributing to a retirement fund. The key is striking the right balance.

In general, saving for retirement is a "must have" and saving for college is a "nice to have." Though taking loans for college isn't ideal, there are no loans for retirement. For many people, getting into the monthly and regular habit of contributing to their child's college savings accounts early on is a great first step on the path to making their "nice to have" goal a reality. Once you've established a saving habit, try to increase your monthly savings as time goes on. These extra dollars, if invested early and given time to grow, could yield significant savings over time:

"For many families, finding an extra $50 or $100 per month may seem out of reach, but these extra dollars, consistently saved, could potentially boost college savings by nearly $20,000 to almost $40,000," adds Ridolfi (see graphic).

4. Talk to your kids early about expectations

In Fidelity's survey, most parents planned to cover the majority of college expenses—but not all of the expenses. Many parents expect their children to contribute but few of those surveyed have talked to their children about their expectations. In fact, 40% of parents with kids in 10th grade or higher haven't yet told their kids that they will be expected to contribute to college expenses.

What's more, many of those surveyed, 43%, hadn’t talked with their children about how much student debt they may need to incur to pay for college. It's no secret that student debt can have a long-ranging impact on the future financial wellness of parents and students, so it could make sense to get kids involved in planning for their futures early.

5. Consider getting help

Working with an advisor can help parents get on track with their college savings and feel more confident about their choices. In Fidelity's survey, 64% of families working with an advisor felt closer to reaching their goals as a result of that relationship.

Parents working with a financial advisor were more likely to say they had a good understanding of how best to save for college too. Just over 65% of parents with an advisor said they understood their accounts and how much to save compared to 40% of people without an advisor. In addition, 86% of those working with an advisor had started saving for college, versus only 59%.% of those families not working with an advisor.

If possible, get your child or children involved in the planning process so that they understand the true cost of college and the potential long-term impact of borrowing. Having the opportunity to save for part of their college expenses could help avoid some borrowing.

Take the time to plan

Saving for college requires a concerted effort over many years and there are lessons to be learned from parents who have already gone through the process. "It's important to start when your children are young, manage their expectations, and be prepared to make course corrections along the way. By developing a plan early, adopting a smart savings strategy, and seeking help along the way, parents can better keep their college savings on track along with other savings priorities like their own retirement," says Ridolfi.

Next steps to consider

Open a flexible, tax-advantaged 529 savings plan.

Analyze your portfolio and create a clear plan of action.

What to consider when borrowing for college.

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