DES MOINES, Iowa — Parents remain determined to save money for college even in the tough economy, but they're not always choosing the methods that give them the best bang for their buck.
The nation's leading college lender Sallie Mae released Tuesday its second annual study of college students and parents conducted by Gallup Inc.
It shows 60 percent of parents have saved money for their child's college education, about the same as a year ago. However, it is surprising that nearly a quarter of all college savings has been set aside in retirement accounts including 401(k)s or individual retirement accounts, said Sarah Ducich, senior vice president for public policy at Sallie Mae.
The typical family saving for college has amassed an average of $28,102 and is projected to have saved $48,367 by the time their child reaches age 18.
The problem with relying on retirement accounts is that when money is withdrawn before age 59 1/2, the accountholder must pay taxes on the funds as well as a 10 percent penalty.
As an alternative, some families are choosing to take out a loan against a 401(k) account. This is also problematic because it removes a portion of the retirement fund, reducing the potential for growth. Also there's the possibility that the loan will need to be repaid quickly if the accountholder changes jobs. Whether an outright withdrawal or a loan, either way, parents are shortchanging their retirement savings potential, Ducich said.
An additional disadvantage to using the 401(k) for college savings is that the money withdrawn this year counts as income for the parents. This means that when the family applies for financial aid the next year, that amount will be included in income, reducing potential aid.
Of course not all savings is held in retirement accounts. About 21 percent of money set aside for college is in investments and 14 percent sits in general savings accounts, which return very little interest.
About 12 percent is held in dedicated college savings 529 accounts.
A few responses in the 2010 study show signs that economic pressures have affected how families are setting their savings goals.
About 72 percent of parents say they expect to pay half or more of their child's education costs, but that is down from 79 percent a year ago. Also, fewer parents intend to pay most of the cost with 27 percent saying that this year, compared with 33 percent in 2009.
That's one more indicator that the recession has forced people to make decisions about their money, said Bill Diggins, a senior consultant at Gallup Inc., who helped conduct this year's survey.
Economic confidence has dropped over the last couple of years and discretionary spending has gone down and continues to fall. Savings rates however, have increased. Diggins said Gallup research indicates about two-thirds of those who are saving more say it's a permanent change.
"We're finding people will pay for and sacrifice for things they value," Diggins said. "It's clear from these studies that they continue to place a high priority on college for their kids."
The study illustrates that point with 21 percent of parents saying college savings is their most important savings goal, up from 14 percent in 2009. Saving for retirement fell to 22 percent as the most important savings priority from 27 percent.
About 38 percent of families said they are saving the same this year as last year and 34 percent said they are saving less. About 28 percent boosted their savings.
The study also shows that families understand the need to start early. The average age when parents began a college account is about 3 years old.
It's important now to educate parents on the most efficient ways to save, Ducich said.
The dedication to help children obtain a college education is there, it's now a matter of helping families put that savings to work balancing earning potential with safe investments that help them reach their goals.