College has consumed every third waking moment of my life for the past 13 years.
First I had to decide where I wanted to go to college. Then, after four years of enjoying college, I’ve spent the past eight years worrying about paying off my student loans. Graduate school didn’t help lighten my debt burden.
If anything, my college consciousness has only heightened since the birth of my son almost three years ago. Not only are my wife and I crafting a repayment plan to service our student loans, we’ve also started saving for our tyke’s higher learning. We stash a little bit away every month into his 529 plan and would save more if not for pesky essentials, like shelter and food.
We’re not alone. Almost two-thirds of millennial parents are saving for their kids’ college fund, compared with 61% of boomer parents and only half of Gen X moms and dads, according to How America Saves, a recent survey by Sallie Mae and Ipsos. Of the nearly 2,000 parents surveyed, millennials (those age 35 and younger) reported having the most saved—$20,155 on average—and were more likely to use a 529 plan and set a savings goals than older parents. Perhaps that explains why millennials expressed the most confidence of any generation that they will be able to pay for their kids’ education.
Millennial parents also put more pressure on themselves to bear the cost of college. Nearly 40% of millennial parents said they should be solely responsible for tuition, room, and board, compared with 26% of Gen Xers and 18% of boomers.
“Millennials are idealistic about the value of college, but they’re also taking specific steps to pay for it,” observes Sallie Mae’s Rick Castellano. Whether millennials are socking away more because they start earlier (56% started when their child was younger than 5) or because their own student loan burden makes them more sensitive to the amount of debt a 22-year-old can reasonably deal with is hard to say.
The yearly survey reported that the percentage of parents saving for college climbed to 57% this year, the largest share since 2010, and 51% of parents said they had a plan to save for college, the highest level since the study began. Respondents said they have more than $16,000 saved on average, almost $5,000 more than in 2013, and 37% are using a 529, seven percentage points more than three years ago.
“The broader shift from 2015 to 2016 is related to continued economic recovery,” says Ipsos senior vice president Julia Clark. “People are feeling much more optimistic.” Stocks and bonds are up big compared with last year, while income growth has finally started to pick up and consumers are feeling more confident.
Millennial parents’ disproportionate use of 529 plans allowed their college savings to take advantage of gains in asset prices.
Overall, the growth in 529 plan enrollment is especially positive. These savings vehicles, akin to IRAs for college, give parents a much better shot at reaching their savings targets. Named for the section of the tax code that created them 20 years ago, 529 plans let contributions grow tax-free, and many states also allow you to deduct contributions from your state taxes.
The plans offer a menu of investment options to select from, and one popular choice is a portfolio tied to your child’s age: the fund is loaded up on stocks when she’s young, then shifts to bonds and even cash as freshman year approaches. You won’t have to pay taxes on withdrawals if you use the money for education-related expenses.
And yet many families are still not taking advantage of 529s: Four in 10 parents say they’re using a checking account to hold their college savings, and six in 10 report using a plain old savings account. While it’s certainly a good thing these parents are saving at all, the opportunity cost of not putting money into a 529 is large.
Take the example of parents who contribute $300 a month to a 529 that yields 5% annually. In 18 years, when it’s time to start paying tuition, they will have roughly $106,000. By comparison, if they stash their cash in a savings account that pays 0.5% in interest (roughly what you’ll get from an online bank), they’ll come away with only $68,000.
All this doesn’t make saving for our son’s college education any easier. Whatever money we make still has to fill so many buckets: student debt, retirement funds, rent, food, and the occasional bottle of Malbec to ease the stress of it all. We want to go on vacation every now and then, too, and eventually buy a house.
But we save what we can for our kid. As parents, it’s our responsibility.