Parents Failing to Plan for Children's Higher Education
September 17, 2007
Parents certainly are aware of the need to save for children's college education, but not all are stashing away money in appropriate investment vehicles, such as 529s that are tax-free.
Seventy-three percent of parents have some sort of college savings plan, and 80% of investors are aware of 529 plans, according to a survey conducted by The Hartford Financial Group, which interviewed 2,549 parents in households with children under the age 15.
"There is no disagreement that college saving should be done, but there is a disconnect on what action to take to do it," said Jeff Coghan, director of The Hartford's SMART529 Programs.
The average 529 plan has around $12,000, according to the College Savings Plan Network. The average cost of a private four-year school in 2006/2007 $22,218 a year and $5,836 for a public school.
The Hartford discovered misconceptions about 529s. For one, many parents have a perception that it doesn't matter how they invest, just as long as they do, Coghan said. However, if parents are investing through CDs or savings bonds, they are not taking advantage of tax-free 529s.
Seven out of 10 parents surveyed said they were saving for college, but were not using a 529. Twenty-six percent of parents said they knew a lot about 529 plans, a slight increase from 21% in the survey the year before.
If a parent is saving in a tax-free 529 versus a taxable account for a significant number of years, they will see a substantial amount of more money in the 529, said Joseph Hurley, founder and CEO of SavingforCollege.com. Hurley also said that most 529s charge small fees.
Another myth is that parents believe they need a large amount of money to start saving for college. There are many 529 plans that have extremely low minimum contributions of only $25 a month, Coghan said. The key is to get started saving money, he said.
Even if parents start saving a minimum amount a month, it will keep reminding them of their goal to save for college, Hurley said. As soon as a child is born, parents should open a 529 plan, he said.
Also, many individuals put retirement planning ahead of college savings. Twenty-one percent of parents have not saved for college because they are focused only on retirement.
Retirement planning should come first before saving for college. However, parents should view them as connected issues, Coghan noted. People should have a complete financial plan and think of all issues such as retirement planning, college savings and buying a home.
If an individual falls short of money in retirement, they don't have any other options for funding, Hurley noted, adding that if not enough money is saved for college, people have other options such as loans, adjusting one's budget or having their child take a part-time job while in school.
Financial advisers are key to helping parents understand and take advantage of 529s. Thirty-one percent of parents started saving for college as a result of talking to a financial adviser, the survey found, and 26% are still continuing to work with a financial adviser.
Furthermore, parents who work with an adviser are more apt to own a 529 plan; 45% of parents who work with an adviser own a 529 plan.
"Advisers play a huge role in helping investors allocate their savings properly, and help parents realize how much to save, where to allocate money and how much risk to take on," said Brian Boswell, a research analyst with Financial Research Corp. in Boston.
Advisers establish moniters for investors and help to achieve goals, he said.
Advisers can establish a good deal of trust with clients by talking to them about college saving, and it is a good opportunity to develop a relationship for the next generation, Coghan pointed out.
Over time, 529s will become more popular as the word spreads about them. There is a lack of knowledge about college saving in general, and it is a fairly new topic, Coghan said.
In response to the survey, The Hartford launched a "Save Smarter" campaign to encourage advisers to help their clients save for college. It is a three-step strategy that addresses college saving myths and helps get parents on track to plan ahead for college costs.
The first step is making sure that parents are using the right investment vehicle to save for college, Coghan said. The second step is to have parents start saving at an appropriate time, preferably right after the birth of a child, he said. Lastly, financial advisers can help parents build a smart strategy for saving. Coghan suggested that parents could ask extended family members and friends to contribute money to a child's 529 plan, instead of giving them a bond certificate on a special occasion.
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