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 2015,1 nine in 10 parents believe college is a good investment in their children's future and can give them "an array of opportunities" they wouldn't otherwise have.
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 2015-2016 is $19,550. For a private college, it's $43,920.2
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 doing what they can now to make that happen."
Polimeni outlines some of the key college savings and investing tactics trending with parents today.
"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 save or invest earlier allows parents to take advantage of more years of potential growth through compound earnings over time.
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.3 "They know that they were dealing with their college loans many years after the fact. And they don't want their children to be burdened with that same experience," says Polimeni.
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.
Taking advantage of 529 benefits
The use of 529 plans 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 the earnings portion of any withdrawal is 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 state-sponsored plans offer residents a state income tax deduction for their contributions.
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.
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.
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.
Getting a little help from friends and relatives
More than half of the parents (51%) surveyed by the College Savings Foundation said they are asking 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."
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 (82%) of students polled by the College Savings Foundation in 2015 believe it is their responsibility to pay for at least part of their higher education.4
"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.