Top 7 college savings trends

Text size: aA aA aA
How are today's parents saving for their child's college education?
Paying for college doesn't have to break your budget. Here are common saving and investing methods parents are using today.
Most parents know how important it is to get a college education in today's economy. According to the Sallie Mae report, How America Saves for College 2016, 90% of parents who have a child younger than age 18 believe college is a good investment in their children's future, and 82% said they were willing to financially stretch themselves in order to give their children the best opportunities. Footnote 1
Still, college requires a hefty investment for most families. According to the nonprofit College Board, the average cost for a single year at a four-year public college or university in the U.S. for 2016-2017 is $20,090. For students attending an out-of-state public college, that figure jumps to $35,370. For a private college, it's $45,370. Footnote 2
The average price of one year of college
Projected single-year college costs over the next 18 years
These eye-opening costs have caused parents to take a fresh look at the strategies they use to help pay their college bills, says Richard Polimeni, director, education savings programs, Merrill Lynch.
"The reality of college costs is a major concern for most parents," says Polimeni. "But it's also a great motivator because they want their children's lives to be better — and free from the kind of college debt they themselves had to take on. Parents are planning and saving now to make that happen."
Polimeni outlines some of the key college savings and investing tactics trending with parents today.

1. Starting earlier

"A few years ago, the average age of a beneficiary for a new 529 account was around nine or 10 years old," says Polimeni. "Today, it's closer to five or six years old." Starting to learn about how to save or invest earlier allows parents to take advantage of more years of potential growth through compound earnings over time.

2. Saving more, borrowing less

Young parents who have only recently finished paying off their own college loans have a strong desire to save more and borrow less to finance their children's college education: 82% of parents who had college debt said it had made them consider other strategies for their children. Footnote 3
Savings has been the No. 1 way of saving for college for the last four years of the State of College Savings survey. "We are encouraged to see that parents are avidly saving, and are motivated to avoid taking on debt for themselves and their children," says Polimeni, who is also chair of the College Savings Foundation.

3. Setting a realistic savings target

Parents are now being more realistic about the amount of college costs they are willing to take on without jeopardizing their other priorities, including retirement savings, Polimeni says.
"We see a definite change from parents feeling that they have to finance 100% of college costs to realizing that there are a variety of other funding sources and strategies they can use in their saving efforts," he notes. "The objective should be to set a realistic goal that is achievable."

4. Taking advantage of 529 benefits

The use of 529 plans made simple for college investing is increasing, says Polimeni, because of their potentially significant tax and estate planning advantages and beneficiary flexibility.
529 college savings plans offer potential tax-free growth, and withdrawals, including any earnings are federal (and possibly state and/or local) income tax free if used for qualified higher education expenses. Although 529 plan contributions cannot be deducted from federal income taxes, some 529 plans offer residents a state income tax deduction for contributions to the in-state plan. There are also a handful of states that offer a state-tax deduction for contributions made to any 529 plan, not just the in-state plan.
Use of 529 college savings plans has risen significantly since 2001
Another advantage: 529 plans give the account owner the flexibility of changing beneficiaries potentially income tax free if the original beneficiary chooses not to go to college.
To understand your college investing choices and decide if a 529 plan is right for you, see our plan comparison chart.

5. Using bonuses, tax refunds and other windfalls

Today's college savers also are looking to a variety of funding sources, including bonuses, tax refunds, earnings from hobbies and inherited money, to fill the college funding gap before they resort to taking out loans.
Parents whose children are "graduating" from day care to public elementary school have been using another great option, says Polimeni. "They take the money they have been putting aside every month for day care and redirect it into a 529 college savings plan."

Parents take the money they have been putting aside every month for day care and redirect it into a 529 college savings plan.

— Richard Polimeni,
Director, Education Savings Programs,
Merrill Lynch

"When you find yourself in a situation where you suddenly have extra money every month that you're used to spending, it also can be helpful to set up a recurring automatic draft from your checking account to your college savings plan account so you're not tempted to spend it on something else," says Polimeni.

6. Getting a little help from friends and relatives

More than half of the parents (59%) surveyed by the College Savings Foundation said they would ask family or friends for college savings contributions instead of material gifts.
The number of grandparents who are helping to pay for a grandchild's education through outright gifts to the college or contributions to 529 plans is also increasing, Polimeni says. This strategy also can be beneficial for the grandparent's estate and gift tax liabilities. Learn more about investing gift options and limits at "Using 529 plans to invest for college and transfer wealth."

7. Sharing costs with their students

Increasingly, parents are asking their older children to take on a portion of their own college costs — and today's high school students are willing to do so. The vast majority (89%) of students polled by the College Savings Foundation in 2016 believe it is their responsibility to pay for at least part of their higher education. Footnote 4
89% of high schoolers plan to pay all or part of their college costs
"As they look at alternatives to take care of this big-ticket item, parents are getting their children involved in the conversation," says Polimeni. Often that means setting a dollar amount they can afford and then working with their child to find ways to supplement it, such as via work-study options, part-time work, grants, scholarships, financial aid and student loans (which Polimeni says should only be used as a last resort).
For more on having the conversation with your child as college approaches, read "It's never too late to save for college."
Of all the latest trends in college savings, perhaps the most important one is to get started as soon as you can. Even if you can only save a small amount, every bit helps. "Every dollar saved is one more dollar that you won't have to come up with — or borrow — later," Polimeni says.
Next steps

Footnote 1 "How America Saves for College 2016," Sallie Mae, salliemae.com

Footnote 2 "Trends in College Pricing 2016," College Board, collegeboard.org

Footnote 3 "2016 Parents Survey: Reality of College Costs Looms Large," College Savings Foundation, collegesavingsfoundation.org

Footnote 4 "2016 Survey of Youth: High Schoolers' Savings for College Jumps in 2016," College Savings Foundation, collegesavingsfoundation.org

Investing involves risk, including the possible loss of the principal value invested.

This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available through the Merrill Lynch family of companies.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

ARF9WQ7L-EXP051818