Student loan borrowers have been on a financial roller coaster over the past two years as courts have batted around the Biden’s administration’s forgiveness plans. Most recently, on Sept. 5, Chief U.S. District Judge J. Randal Hall issued a temporary restraining order against the president’s second effort to cancel debt, leaving borrowers in limbo once again. With loan forgiveness uncertain, U.S. students remain on the hook for $1.753 trillion in student loan debt, according to the Education Data Initiative.
It’s easy to see how this debt has accumulated considering that the average cost of college has increased by more than 100% in the 21st century. The Education Data Initiative also found that the average in-state college student spends $27,146 per year on tuition and on-campus housing, while the average student who attends a private, nonprofit university spends $58,628 each year for tuition and housing. That means students will spend between $108,000 and $234,000 to complete a four-year degree.
The Fidelity Investments® 2024 College Savings Indicator found that nearly all (93%) of parents are concerned about inflation and increasing college costs. With these concerns heavy on their minds, parents are scrambling to fund their students’ college dreams.
Parents are saving more
Parents are saving for their children’s higher education in unprecedented amounts. For the first time in its 18-year history, the College Savings Foundation’s State of Higher Ed Savings Survey reported that more than half of parents said they are saving in a 529 plan. These plans are tax advantage savings vehicles for education expenses like tuition and books.
The survey, which polled more than 1,000 parents of children aged 25 and younger in July 2024, also found that parents are saving more than ever before. Nearly 75% of parents said they had saved upwards of $5,000, while more than half had saved at least $10,000.
Chris McGee, chair of the College Savings Foundation, a nonprofit that provides public policy advocacy for 529 plans, says that parents are saving more because of the value they place on higher education. “We saw in our survey that parents almost universally (88%) say that education is a lifetime commitment,” he says. “I don’t think it’s any secret that higher education is expensive.”
According to McGee, increased savings may also be a result of “how corrosive the impact on student debt can be on a child’s at least first years out of higher education.” He adds that it “may delay homeownership. It may delay buying that first car. [And] it may delay you moving out of your parents’ basement.”
The advantages of 529 plans
Ryan Firth, a certified college financial consultant and founder of Mercer Street Co., says that some of his clients’ burdensome experiences with student loans have driven them to save furiously for their children’s educations. In some cases, this causes families to overfund their students’ college savings accounts. Families whose savings have outpaced their student’s needs are thus eager to tap into new options for 529 savings plans.
Previously, parents may have balked at being locked into a 529 plan because the funds can only be used for qualified education expenses and it’s difficult to anticipate a student’s needs in advance. However, the passing of SECURE 2.0 legislation has lent these accounts new flexibility by allowing established 529 accounts to roll over into a Roth IRA for the same beneficiary. This way, unused college savings can kickstart a young person’s retirement savings.
Additionally, 529 plans can now be used for continuing education classes, apprenticeship programs and associated expenses (like tools), and student loan repayments. If a student doesn’t need all of their 529 plan, parents can change the beneficiary to themselves to fund their own educations or another child’s, including school tuition for kindergarten through 12th grade. Parents can also contribute more—up to $18,000 per year, or $36,000 if married and filing taxes jointly.
Financial shortfalls
Being able to roll college savings into a Roth IRA, however, is only a dream for many families who won’t be able to save enough to fully cover their students’ expenses.
McGee acknowledges the overwhelm that parents may feel as a result of this savings shortfall. “My advice is not to focus on that. Every little bit helps,” he says. “My wife and I saved. And we didn’t save for every last dime of our children’s education. But looking back on it, it helped tremendously to have some money set aside.” He also recommends starting as early as possible, even if that’s when a child is in high school or is already in college.
Other funding strategies
Mike Hunsberger, a certified college financial consultant and founder and the lead advisor of Next Mission Financial Planning, says that parents who aren’t sure their student is going to go to college—or who worry that the college picture is going to change before their student enrolls—can tap into traditional investment accounts rather than 529 plans. This route may provide more flexibility in the future. However, he advises keeping this account out of arm’s reach so it isn’t used for regular expenses.
Parents may also look into borrowing via a PLUS Loan to cover education expenses. However, Firth recommends weighing these loans against retirement needs. Parents should focus on “making sure that [they have] adequate assets and [aren’t] burdened with debt as they get close to retirement,” he says. “It’s a balancing act, right? Trying to figure out, ‘How much do I support my child? And how much do I need to watch out for myself and take care of my financial future as a parent?’”
Hunsberger says that a few years ago, home refinancing was a valid means for families who truly needed to get creative to pay for their student’s college dreams. However, until home interest rates fall, he advises against tapping into home equity as a funding source.
Overall, he advocates for shopping smart. The key is “finding the school that fits [your student’s needs] but also fits your budget,” he says.
Students are getting involved
The College Savings Foundation also found that, like their parents, students are saving in record numbers for higher education. Today, 57% of the students surveyed were saving, as opposed to only 50% in 2023. More than three-quarters (77%) of those surveyed had saved over $1,000. Students are also expecting to work during college rather than rely solely on parental support.
Students may also be able to reduce costs through alternative approaches, such as attending community college first and transferring to a four-year institution later, taking AP classes in high school to earn college credit, testing out of basic university classes or seeking out employers with tuition forgiveness programs.
“I think the strategies are as individual as the student who is thinking of them,” McGee says.
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