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Returns Worry Parents Saving for College


Only 61% of parents are saving for college, and many of them are beginning to wonder why.

A new study on college savings indicates that 29% of the parents saving for college fear that they won't have enough to meet future college costs. Despair is stronger among non-savers; 50% of the 39% of parents who aren't saving for college don't expect their children to attend college, up 15% from last year.

Aegon International Markets of Louisville, Ky., commissioned Harris Interactive of Rochester, N.Y., to interview 500 parents of children 18 years or younger across the country. Harris conducted the phone interviews in the last week of March.

Aegon wanted to "get a true cross section of America, not just mutual fund investors," said Connie Dorval, director of marketing communications for Aegon.

On average, parents believe they'll need to save $80,400 for four years of college tuition. This amount increased significantly from $45,500 in 2001. More than four in five savers fear college costs will be "astronomical" by the time their children are ready to enter college.

Conservative Approach

Even though parents expect they will need more than $80,000 to put a child through four years of college, 70% say they are investing more conservatively due to the market downturn, up from 61% in the 2001 survey. In fact, 61% of parents are saving for college through bank savings accounts, up from 54% last year. Only 44% are using mutual funds for college savings.

In fact, only 7% of parents describe their investment style as aggressive. Eighty-three percent of parents say they would not risk the principal they have in their children's college education fund.

Again this year, 71% said they would be interested in investments that guarantee preservation of principal while yielding a better return than money market funds.

Additionally, 43% of parents say that should their college savings account start to lose money, they would switch to more conservative investments. However, only 10% report making any switch in the last year.

Dorval noted that the study highlights a "significant mismatch between investors' expectations and reality." This year, investors expect a 19% annual return, down from 24% in 2001. However, 27% expect a return of less than 10%, up from 17% last year.

When asked about actual returns, only 10% reported a return of 10% to 24%, and 26% said their college savings investments have returned only 1% to 9% in the past year.

"Investors are still emotionally stuck in the 90s. We built our future plans based on a booming market we thought would never end. It may take some time to adjust investors' expectations," Dorval said.

In another interesting conflict, while three in four parents admit that they do not know enough to make good investment decisions and wish they knew more about how to invest for their children's college expenses, 62% say they prefer a college saving plan that they can manage themselves. Only 33% say they prefer a savings program that is automatically adjusted based on the child's age.

The study also found that a majority of parents who are saving, 67%, began to save before their children were five years old. Thirty-one percent began to save before their children were a year old. Thirty-eight percent say they are saving on a regular basis, down slightly from 40% in 2001.

The majority of non-saving parents, 65%, say they have no discretionary income. Seventy-two percent of parents not saving say they will pay expenses as their children attend college, up from 62% in 2001.