By Susan Gregory Thomas
Hard to believe, but millennials aren’t just kids anymore. They’re starting families, and their financial priorities as parents couldn’t be more grown-up. Their chief objective: to save for their children’s college educations early and fully, according to a Fidelity survey.
What’s their motivation? Avoiding student debt.
Millennials (born between 1981 and 1997) came of age struggling to pay off student debt while becoming financially independent. More than half (56%) took on student loans that they’re still paying back.
They want their own kids to graduate debt-free, so they’re committed to college savings. On average, millennial parents say they plan to pay for three-quarters of their children's college costs. And 46% of them plan to cover the entire sticker price, according to the survey.
How Millennial Parents Save for College
That’s not just high-flying bluster. Millennial parents are more disciplined about their college cost goals than prior generations. Here are five savings tactics that separate millennial parents from their predecessors, according to the Fidelity report.
1. They have a plan.
The majority (68%) develop an investment plan to keep themselves on track. That’s a smart move, because college savers with a plan are often more successful than those without a plan.
According to the 2015 How America Pays for College report from Sallie Mae, parents who are planning and saving for college have put away an average of $11,102. That’s 46% more than the average $7,610 saved by families without a plan.
The report found parents who plan also keep their savings goals on track by:
- Researching college costs (30%)
- Opening a savings account for the child (31%)
- Investing in their child’s skills to increase the chance of merit scholarships (28%)
- Researching financial aid eligibility guidelines (28%)
You can be a planner, too, when you use Goal Investor’s Education Fund Guide to set a college savings goal.
2. They start early.
Nearly 60% of millennial parents started saving before their children turned six, the Fidelity survey found. Less than half of Gen Xers (47%) and baby boomers (37%) got an early start.
The sooner you start saving for college, the longer your investment has to grow.
3. They’re consistent.
A whopping 79% of the millennials surveyed in the Fidelity report save for college every month.
One key to consistency is automating savings. If you set up a college savings account and have your contributions automatically transferred each pay period or each month, you won’t have to remember to fund the account. Inertia will work in your favor and the money will keep flowing into your education fund unless you take action to stop it.
4. They save in tax-advantaged accounts.
Of all generations, millennial parents are the most likely to invest in 529 college savings accounts (43%), Fidelity found.
When you save in a tax-advantaged account, you typically avoid paying taxes on your earnings (as long as you follow the rules). Paying less in taxes leaves you with more money to pay for college.
One caveat: 529 plans carry restrictions about how the money can be used, and by whom. To give yourself some financial flexibility, we suggest that you save at least 20% of the total estimated cost of college in an unrestricted investment account.
Even when your kids are teens, it's hard to know exactly what kind of college education will be right for them. That's a good reason to avoid putting more than 80% of your college savings in a restricted account like a 529 plan.
5. They bump up savings as their earnings increase.
Almost 60% of millennial parents increased the percentage of their monthly savings over the past year, the Fidelity study found. Committing a portion of every salary increase to savings is a great idea, but your college fund is not always the right place to put your extra income.
Saving for retirement trumps saving for college in almost every case. You have many ways to make college more affordable, including:
By contrast, you don’t have nearly that range of options or flexibility when financing your retirement. Pensions and Social Security may provide a floor of income, but beyond those, you’ll need to fund your retirement through personal savings.
Do you know how much you’ll need to save for college and save for retirement? Goal Investor helps you clarify your plans. You can explore different ways of spreading your savings dollars between retirement and college funds and see how shifting savings from one goal to another can affect the likelihood of meeting both goals.
Will Millennials Hit College Savings Goals?
As determined as they are to pay their children’s college expenses, more than half of millennial parents (55%) are worried they won’t be able to pull it off, the Fidelity report revealed. Analysis shows they may have cause to be concerned.
Based on estimates of their current savings, millennials won’t be able to reach their goal of covering 75% of college costs. Their projected savings will more likely cover only 27% of future college costs, by Fidelity’s estimates.
However, those numbers are just averages. How much of your children’s college expenses you’re likely to be able to cover depends on individual factors, like how early you start saving, how much you contribute and where your children attend school.
The Goal Investor College Planning Tool lets you tinker with different options to build a custom education savings plan. Check out how easy it is to use.
This information is provided for educational purposes only and is not intended to provide investment or legal advice. SEI does not claim responsibility for the accuracy or reliability of the information provided.
Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.