March Madness isn't just college basketball: It's a reminder that your kids may be heading to college someday and that you'll need to save a whole lot more to make that happen.
As the NCAA tournament tips off, parents across the country are quietly freaking out over just how little they've saved for their child's college education. According to a recent survey by Fidelity Investments, 45% of parents have no idea what they should be saving for college.
When asked what they expect the four-year cost of college will be by the time their child heads to campus (before financial aid, scholarships or other discounts), parents of preschoolers fell short by an average of $110,000, according to the current rate of college tuition inflation. Even parents with high school students underestimated the price of a four-year degree by an average of $70,000.
"While families have adopted more active and effective savings habits over the past decade, this year's study still finds that on average, parents are on track to reach just 29% of their college funding goal by the time their child heads to campus," says Keith Bernhardt, vice president of retirement and college products at Fidelity Investment.
According to the College Board, the cost of attending a four-year public college as an in-state student hit an average of $9,648 a year this year, while the cost of a four-year private school has climbed above $33,000. Throw in room and board, and those annual costs jump to $20,000 and $45,000, respectively. The average 2017 college graduate is carrying more than $37,000 in student loan debt, according to college and scholarship site Cappex. That debt is carried by more than 70% of all graduates and is up from $12,759 two decades ago, when just 54% of all students graduated with debt.
Though they may be falling short, parents are still saving for college with a great of urgency. Eight-in-10 parents say they're saving to prevent their child from taking on student debt, which 85% of parents estimate will add up to $45,000 in student loans by the time their child finishes college. Parents already plan to take on 51% of college costs with their own savings and parental loans. They expect their child to take on 23% of expenses and estimate another 19% will be covered by scholarships.
This is optimistic at best, considering that 37% of parents with children in high school are still paying down their own student loans. Talk to preschool parents, and a whopping 68% are still mired in student loan debt. However, parents have a few extra tools at their disposal to help them out. Among parents saving for college, 48% are doing so in a 529 plan, where savings grow tax-free. They're saving a median of $300 a month, with (93%) believing that saving in a dedicated college account helps keep them on track.
"Juggling the multitude of financial priorities that are a reality for most families can be overwhelming, from saving for college, to planning for retirement, to building an emergency fund, to managing additional day-to-day financial responsibilities," says Ron Hazel, senior director of Fidelity Advisor 529 and individual retirement products.
With 80% of parents saying that their own experience with paying for college and managing student loan debt are driving their decision to save for college, it's little surprise that, as HSBC Group discovered, 60% of parents would be willing to go into debt to fund their child's college education. Roughly 60% of parents say paying for their child's education makes it more difficult to keep up with other financial commitments, but they consider student loan debt rather than long-term savings (40%), credit card repayment (37%), and retirement savings (37%).
"The financial sacrifices that parents are willing to make to fund their children's education are proof of the unquestioning support they will give to help them achieve their ambitions," says Charlie Nunn, HSBC group's global head of wealth management. "However, parents need to make sure that this financial investment is not made to the detriment of their own future wellbeing."
Despite the cost, it's still infinitely more expensive to forego college than to get a degree and pay off your debts. According to a 2014 study by Pew Research Center, those who graduated with bachelor's degrees or better saw their unemployment rate drop to 2.5% compared to 4.4% for those with some college education or an associate's degree or 5.2% for high school graduates. More than 70% of those with bachelor's degrees or better are employed, compared to 54% to 64% of those without said degrees. Perhaps most importantly, the median annual income of college graduates ranged from $57,200 for those with a bachelor's degree to $85,228 for those with professional degrees. That's compared to $37,436 for high school graduates and roughly $40,000 for those with some college or an associate's degree.
To help parents plan for college well beyond March Madness, Fidelity also suggests the "2K Rule of Thumb" to provide a rough estimate of what parents should be saving. Assuming that they want to cover 50% of a child's annual college costs out of savings, their rule of thumb suggests multiplying your child's age by $2,000. If your child is seven years old, you should have $14,000 saved to stay on track. That assumes you're going to continue saving at the same rate and that your child will be 18 come time to head to campus.
"At least once a year, take the time to ask and answer whether you're on track to reach your goals," Bernhardt says. "If you find yourself falling behind, don't be discouraged."