How to Jumpstart Saving for College

As college costs rise, so does the level of worry parents have about how to pay for it all. But, it turns out, worry can be a great motivating force.

That's according to Fidelity Investment’s 10th annual College Savings Indicator Study, which found that the number of parents saving for college has risen sharply: 72% are putting away money for their kids’ college, up from 58% in 2007. The national survey includes parents with children 18 and younger who expect their kids to go to college. The survey respondents had household incomes of $30,000 a year or more.

“There’s a growing national dialogue about paying for college and student debt,” says Keith Bernhardt, vice president of college planning at Fidelity. “It’s an emotional issue for parents who value college but don’t want to have their kids saddled with debt to get a degree.”

The majority of parents believe a college education is a must to land a decent job, but three quarters of families surveyed said their children will graduate with so much debt it will hinder their ability to be financially independent.

Doubling the Amount Saved, Still Falling Short

It's that kind of concern that helped push the percentage of parents saving for college to the highest level since Fidelity first began tracking nearly a decade ago, says Bernhardt. Parents are putting away double the amount they did then, about $3,000 a year from $1,500 in 2007. Three-quarters of parents are saving a about $300 a month. The average total amount saved is $41,500.

While that’s all good, most people are still way behind on reaching their savings target.

Ambitious goals are part of the reason. On average, parents want to cover 70 percent of the total cost of college for their kids, up from 57 percent in 2007. And the percentage of parents who want to pay the whole tab is also up significantly: 43 percent want to foot the entire bill for school vs. 18 percent in 2007. With college costs topping $20,000 a year for a public four-year university and $43,000 a year at a private college, it’s not a surprise that so many parents are falling short.

Four Steps to Saving More

So, what are you to do if you’re behind on saving? Heeding the lessons learned from other parents can help. In its survey, Fidelity also solicited advice from parents with kids just a few years from college about what they would have done differently to save more. Half said they could have socked away a median $200 more a month. Here are some ideas about how to do that, as well as cut costs.

1. Know that every little bit counts. Make it easier to save by automating what you put away. Have the money directly transferred from your paycheck or bank account into a dedicated account for college savings. Treat it like a bill that has to be paid every month, says Bernhardt. Even a little goes a long way. If you put away $50 a month for 18 years, you’ll have nearly $20,000 (assuming a 6% average annual return). Put away $100 a month and it’ll grow to $39,000 and $200 a month over that time will get you $77,0000. Use tax refunds, rewards from cash-back cards and yes, birthday money to beef up the account.

2. Find ways to reduce the tab. More parents are looking for ways to reduce the cost of school. According to Fidelity, 71 percent of parents are considering strategies to better manage costs, up from 53 percent in 2007. That includes helping your child with a plan to graduate early or at least on time. Just 39 percent of students graduate within four years, according to the National Center for Education Statistics. When your kid is applying to college, focus on schools with high on-time graduation rates and lower than average student debt. You can find those stats at the Department of Education's College Scorecard, which was revamped last year. Some schools are even guaranteeing on-time graduation for students. The State University of New York's University at Buffalo created Finish in 4 program in 2012, which pays the cost of extra tuition for students who fail to graduate in four years if they've used campus counselors, declare a major by sophomore year, and take a full course load every semester.

There are the tried-and-true moves too, such as living at home and commuting, going to a state school rather than a costlier private university, and maximizing financial aid by submitting your application for aid as early as possible.

3. Lower your target. Don’t feel like you need to cover the full cost of your kids' education, especially if it would mean prioritizing saving for college over putting money aside for your own retirement. Having your child take out a reasonable amount of debt is better than sacrificing retirement savings, says Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a website that helps students compare colleges and find scholarships. As the saying goes, you can borrow for college but you can’t borrow for retirement. Kantrowitz suggests a good rule of thumb is to pay one-third from savings, one-third from income and one-third from financial aid grants, scholarships and low-cost federal loans as needed.

That’s pretty much how most families do it. According to the annual Sallie Mae How America Pays for College report, on average parents pay 29 percent of the cost of college from their own savings and income; 12 percent from student income and savings; 34 percent from scholarships and grants; and 20 percent from student and parent borrowing. The rest—5 percent—comes from other family and friends.

4. Make the most of your savings. If you’re still at least three years away from needing the money, put it in a 529 account, which is similar to a retirement target date fund. The money is professionally invested, typically more aggressively when your child is young and more conservatively the closer to college enrollment date. The money will grow faster over time than if you put it in a regular savings account. You can get valuable tax breaks on the money you put away and it won’t be taxed if you spend it on higher education expenses. Choose a low-cost provider, with expense ratios less than 0.5 percent. Wherever you choose to put the money, saving regularly is the most important move you can make.

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