Over the last two years, individuals with student loans have experienced a tumultuous financial situation as legal decisions have fluctuated regarding the Biden administration’s debt relief proposals. Most recently, on September 5, Chief U.S. District Judge J. Randal Hall granted a temporary restraining order against the president’s second initiative to eliminate student debt, leaving borrowers in a precarious situation once more. With the prospects of loan forgiveness remaining ambiguous, students across the U.S. are faced with a staggering total of $1.753 trillion in student loan obligations, as reported by the Education Data Initiative.
The accumulation of such debt is easy to understand given that the average cost of higher education has surged by over 100% in the 21st century. According to the Education Data Initiative, the typical in-state college student is spending approximately $27,146 each year on tuition and on-campus housing, while those attending private, nonprofit institutions are facing an average annual expenditure of $58,628. Consequently, students can expect to spend between $108,000 and $234,000 to obtain a four-year degree.
A recent study by Fidelity Investments® in 2024 showed that a significant majority (93%) of parents are apprehensive about rising inflation and escalating college expenses. With these worries weighing heavily, many parents are actively seeking ways to finance their children’s educational aspirations.
Increased Parental Savings
In an unprecedented trend, parents are allocating greater sums towards their children’s college education. For the first time in the 18 years since it was initiated, the College Savings Foundation’s State of Higher Ed Savings Survey revealed that over half of parents reported saving through a 529 plan. These plans provide tax advantages specifically for educational expenditures like tuition and textbooks.
Conducted in July 2024 with more than 1,000 parents of children aged 25 and younger, the survey also highlighted that parents are saving more than ever. Nearly 75% indicated they had saved at least $5,000, while over 50% have set aside a minimum of $10,000.
Chris McGee, the chair of the College Savings Foundation—a nonprofit advocating for the use of 529 plans—notes that parents are saving larger amounts due to the value they attribute to higher education. “Our survey results show that nearly all parents (88%) believe that education is a lifelong investment,” he says. “It’s no surprise that higher education comes at a high cost.”
McGee points out that this heightened saving trend could also stem from the damaging effects that student debt can have on a young person’s initial years post-education. He remarks, “It may postpone homeownership, delay the purchase of a first vehicle, and even hinder one’s ability to move out of their parents’ house.”
Benefits of 529 Plans
Ryan Firth, a certified college financial consultant and founder of Mercer Street Co., shares that many of his clients’ challenging experiences with student loans have motivated them to save vigorously for their children’s educational needs. In some instances, families have overfunded their college savings accounts and are now eager to explore alternative options within 529 savings plans.
In the past, many parents hesitated to commit to a 529 plan due to concerns about being restricted to using the funds solely for qualified educational expenses, making it challenging to predict a student’s future needs. However, the recent SECURE 2.0 legislation has introduced more flexibility, allowing for the rollover of established 529 accounts into a Roth IRA for the same beneficiary. This provision means that leftover college savings can kickstart a young adult’s retirement fund.
Moreover, 529 plans can now cover costs related to continuing education, apprenticeship programs, and associated expenses (e.g., tools) along with student loan repayments. If a student does not require the full amount in their 529 plan, parents can transfer the beneficiary designation to themselves or to another child to fund their educational pursuits, including expenses for schooling from kindergarten through 12th grade. Parents can also contribute a greater amount—up to $18,000 each year, or $36,000 if they are married and filing jointly.
Challenges in Saving
Though the option to convert college savings into a Roth IRA may seem appealing, many families find it out of reach as they struggle to save adequately to cover their children’s educational expenses.
McGee acknowledges the stress that parents experience due to these savings challenges. “I advise against becoming overwhelmed by this issue. Every little bit helps,” he states. “My wife and I saved without expecting to cover every dollar of our children’s education. Looking back, having some funds available made a significant difference.” He suggests starting savings as early as possible, even if it’s when a child is in high school or already enrolled in college.
Additional Funding Approaches
Mike Hunsberger, a certified college financial consultant and founder of Next Mission Financial Planning, indicates that parents uncertain about their child’s college plans can consider using traditional investment accounts instead of 529 plans. This might offer more future flexibility. However, he warns that such an account should be kept out of easy reach to prevent it from being used for everyday expenses.
Parents can also explore obtaining a PLUS Loan to assist with educational costs. Still, Firth cautions that they should carefully consider how these loans could impact their retirement plans. “Ensuring that you have sufficient resources and are not weighed down by debt as you approach retirement is essential,” he advises. “It’s about striking a balance between supporting your child and safeguarding your financial future.”
Hunsberger mentions that refinancing a home was once a viable option for families seeking creative solutions for college funding. However, he currently advises against leveraging home equity as interest rates rise.
Overall, he emphasizes the importance of prudent financial planning. The central idea is “identifying a school that meets your student’s requirements while remaining within your financial means,” he notes.
Student Participation in Savings
The College Savings Foundation has discovered that, like their parents, students are increasingly saving for higher education. As of now, 57% of students surveyed are saving, an increase from just 50% in 2023. More than three-quarters (77%) reported saving over $1,000. Additionally, students are aiming to work during their college years instead of depending solely on their parents for support.
Students may also find ways to mitigate costs through alternative strategies, such as starting their education at a community college and later transferring to a four-year university, enrolling in AP classes to earn college credits in high school, testing out of basic college courses, or seeking employers who offer tuition reimbursement programs.
McGee asserts, “The strategies individuals consider are as personalized as the students themselves.”
