Thrifty Thinking: Planning Ahead for College

According to a recent survey by Legg Mason, parents often find themselves falling short of their savings goal for their kids' college attendance. Results from the survey indicate there are four primary reasons:

•    48% of parents thought they should have or should be saving more
•    37% said they could not afford to save any more
•    36% did not know how much they needed to save
•    19% did not invest as well as they could

I had the chance to interview John Kenney, Head of Legg Mason Global Asset Allocation group about the implications of these findings and what steps parents can take to be better prepared.

1)    With nearly half of parents thinking they should have or should be saving more, what are the implications for college costs?

It is important to put a savings plan in place as soon as possible. While ideally parents should start when children are young, the key is to at least start. In 2011, tuition at the average public university increased by 8.3% -- a rate that is increasing faster than average wages. By using 529 plans, parents are taking advantage of the ability to compound their savings on a tax advantaged basis.

For those parents who’s college savings programs (such as 529 plans) are falling short, our survey* found they are likely to resort to drawing funds from a number of sources such as savings and investment accounts, their current income, or they get their children to take out student loans. Financial constraints are also forcing families to make personal sacrifices. Those parents with children who have already graduated told us that:

·       36% had their children work through college to help pay expenses

·       20% gave up a vacation

·       15% limited their children’s choice to lower cost schools

·       16% had their children live at home during college

·       9% asked their children to attend a community college first

2)    How do you respond to parents who say they can't afford to save (or save more) right now?

Saving for college is such an overwhelming thought for many parents. It seems insurmountable and 38% of our surveyed parents said they had no idea how much they needed to save for college. The simple act of putting a plan in place and starting regular contributions, no matter how much, will benefit from the impact of compounding growth. If you begin a 529 program right away, you may need considerably less than if you waited a few years and tried to pay expenses with current income.

3)    How can parents help determine how much they need to save for college?

For those parents with a financial advisor, we recommend asking them to help you come up with a plan that will get you to your goal.  Legg Mason’s Scholars Choice 529 plans are Advisor-sold which means that you can open and maintain an account with the assistance of a Financial Advisor. Alternatively parents can go to websites like ours (www.scholars-choice.com) to use the college savings calculator to help determine an appropriate savings rate based upon their view on college costs, investment returns, etc. 

 
For information on Legg Mason’s Scholars Choice 529, college funding news and general 529 industry information follow @scholars_choice on twitter.

*Source: Legg Mason Intergenerational Survey of College Finances of 1,011 parents