There’s some encouraging news on the college front, says Sallie Mae’s “How America Pays for College 2014” study released last Thursday.
A whopping 98% of parents continue to believe that college is a worthwhile expense.
College continues to be a powerful tool for upward mobility. In fact, over 30% of students are the first in their family to ever make it to the ivy-covered halls.
Overall, borrowing for college is down. That’s a positive development, since the rapid growth of college debt has been setting off alarm bells across the country. Parents and students are cutting costs by making better use of community colleges, in-state universities and living at home.
The survey clearly shows the value of planning. Families who plan ahead are confident that they will be able to meet the future costs of college, and actually save 83 percent more money than parents who procrastinate.
Here’s a wrap-up of the good, the bad and the ugly when it comes to college planning.
The good: more parents are discovering the tax-free magic of 529 plans
With 529 college savings plans, all the investment growth is totally tax-free when used to pay for qualified college expenses. That’s a deal you just can’t beat.
According to the survey, 15% of parents now use 529 plans to pay for higher education, putting them at the head of the class when it comes to college-savings smarts.
Almost half of parents pay college bills out of their current income. That’s a good way to do it, and keeps parental debt levels down, but make sure you max your retirement savings before you pony up for college.
The bad: waiting later to plan means the bill goes up
Just over one-tenth of parents borrow to pay college bills. College savings expert Mark Kantrowitz says that’s not the best way to do — it’s always cheaper to save in advance (for example, starting from your child’s first birthday), so the magic of compounding works for you. When you borrow just before the college years, the only thing that compounds is the interest you pay the bank.
The really ugly: the worst ways parents are paying for college
3% of parents put college costs on credit cards. (Credit cards are undoubtedly the worst way to pay, since interest rates are sky-high).
8% take money out of their retirement accounts. (Not a smart move for most parents, who are already behind schedule in saving for their own retirement).
2% charge it to their home equity loan. (Yes, it is potentially deductible, but higher mortgage debt can force parents to work well past their prime).