Parking money in a passbook savings account may be a simple, effective way to save for the family’s summer trip to the Rocky Mountains or for Christmas gifts for the kids.
But as a college savings strategy, it’s only slightly more practical than stuffing dollars under the mattress.
While a range of financial products exists today to help you save for college, many parents still rely on the old faithful passbook that pays a meager monthly return measured in coins on the dollar, according to a new survey by private student loan lender Sallie Mae and the Ipsos market research firm.
Nearly half of the families surveyed who are actively saving for college are socking money away in basic savings accounts. That compared with only 27 percent who are using state-sponsored 529 college savings plans, educational IRAs and other investment products that offer potentially higher returns and tax advantages.
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I could understand the conservatism if parents said they were sticking with savings accounts because they were worried about risk. Anytime you have money in the financial markets, that money is at risk.
But when asked why they were not using 529 college plans, the two most common responses from parents were that they were not sure how the accounts worked or they didn’t believe they had enough money to open one.
Many parents felt confused, uninformed and overwhelmed about their college savings options, said Rick Castellano, a spokesman for Sallie Mae.
That’s disheartening, particularly because many states have spent millions on marketing their 529s, especially targeting middle-income to lower-income families.
Many states have low thresholds of $25 to $50 for opening 529s. The accounts allow your earnings to grow tax free, and withdrawals are not taxed if the funds are used for tuition and other qualified education expenses.
The annual “How America Saves for College” survey — based on interviews with nearly 2,000 families with at least one child younger than age 18 — offered other glimpses of the challenges parents are facing in trying to save for college. Consider that the average 2014-2015 price for tuition, fees, room and board was $18,943 to attend an in-state public university and $42,219 for a private school, according to the College Board.
Sallie Mae said 48 percent of the respondents were saving for college this year, down from 51 percent last year and down from a peak of 62 percent in 2009.
While parents are earmarking about 10 percent of their savings toward college — a percentage that has held steady — the average amount they’re putting away fell 25 percent this year to $10,040 from $13,408 last year. That was the lowest level in three years.
It’s not a question of seeing the value of a degree — 90 percent of the parents surveyed believe college is an important investment. Rather, the decline in savings is a byproduct of tighter paychecks and less being available to save for a host of things, said Castellano.
The good news from the survey: More parents are using automatic deposit services to save than a year ago, more are taking advantage of cash-back rewards programs tied to college savings accounts and more are reducing spending in an attempt to build up college savings.