08/21/2013 12:00 am ET Updated Oct 21, 2013

College Savings At Record Levels, But Still Fall Short


(The author is a Reuters contributor. The opinions expressed are her own.)
By Kathleen Kingsbury
Aug 21 (REUTERS) - Americans are saving for college at record rates, according to new research released Wednesday by financial services firm Fidelity Investments.

Sixty-nine percent of families told Fidelity's annual College Savings Indicator study that they have started saving for college, with parents putting away an average of $5,000 last year. That's up from 58 percent in 2007 and the highest percentage since the survey of more than 2,500 parents nationwide began seven years ago. The survey was conducted by Research Data Technology, an independent firm.

Escalating costs, an improving economy, and increased awareness of savings vehicles like 529 college savings plans all appear to be behind the increase. Rising federal tax rates - for instance, the payroll tax hike in January - may also be convincing more parents to open those state-sponsored 529s, because they offer tax breaks, according to Keith Bernhardt, vice president of college planning at Fidelity.

Yet these latest findings also confirm what fearful parents have expected and several other surveys have shown: many of those dedicated savers still remain a long way from reaching their already-modest goals.

Nearly two-thirds of respondents reported having a financial plan for college, and parents plan to pay, on average, 62 percent of the total cost. "But, in reality, they are only on track to cover just one-third," Bernhardt said.

Jill Morrow knows how that shortfall can feel. A mother of two teens and a toddler in Naperville, Illinois, Morrow and her husband started bank savings accounts for each of her kids when they were born and once thought they'd pay for college in full. After a divorce and patchy employment as a real estate agent, however, Morrow recently promised her older daughter and son she'd do her best to split tuition and fees with them.

"It's still probably going to take loans for all of us, and that's hard to swallow," she said.

The net price of college tuition - after grants, tax credits and discounts are factored in - has risen by roughly 75 percent between 2002 and 2011, according to the nonprofit College Board. Last year tuition and fees at four year public schools rose 4.8 percent to an average of $8,655.

Those state-sponsored 529 plans have long been popular with parents and grandparents because their funds can be withdrawn free of federal and most state income taxes, to cover qualified higher education expenses. Fidelity has seen a 22 percent increase in new 529 accounts opened in the first half of 2013, with average account balances up 8 percent over last year.

This mirrors first quarter data from the Boston-based consulting firm Strategic Insight, which also reports investments in 529s to be up by two-thirds, or $80 billion, over the past five years.

Jim Flores and Maria Cramer opened a 529 account for their nine-year-old son Ben shortly after he was born, and have added about $4,000 to it every year since. This fall, however, they decided to scale that amount back in order to put money away for retirement. "We can't afford both, and know for college, loans are an option," said Flores, a schoolteacher in the Philadelphia suburbs.

Parents have started paying less - Their average out-of-pocket spending declined to $5,727 in 2013 from $8,752 in 2010, according to a survey released by lending giant Sallie Mae in late July.

Indeed, 55 percent of parents told Fidelity that they're concerned their child will need to make educational compromises. About half intend to ask offspring to work part-time during school, take courses online to reduce expenses, live at home, or attend a public university. Some 44 percent report researching grants and scholarships, while 29 percent said they considered less expensive schools.

There is a growing consensus among parents that their children need to play a larger role in paying for college - and that the earlier they understand that, the better.

Parents who first started talking to kids about paying for college before age 10 were about 15 percent more likely to start saving as well, said Fidelity.

Morrow's kids are already pitching in. Ben, 12, sets aside birthday money from his grandparents in his savings account. Emily, 15, is planning to add her summer earnings from babysitting.

Their mother cites a study from earlier this year in the American Sociological Review that showed the more students had to pay for themselves, the better their college grades were. Says Morrow, "so maybe I'm actually giving them a leg up."

(Follow us @ReutersMoney. Editing by Linda Stern)