College Concern, Part 1

Posted by Mike Smith :: October 11, 2007 @ 5:35 am

At a time when a college education is becoming more and more of a necessity for finding a good job, the cost of that education continues to rise. This is cause for concern in many households as parents struggle for ways to afford college. We recently mentioned a study which suggests that many parents are unaware of tax-advantageous 529 College Savings Plans and intend to rely on long term debt, such as second mortgages, to finance their children’s college aspirations.

The study, conducted by The College Savings Foundation, can be downloaded in its entirety here.

Of the more startling results from the survey of nearly 500 parents:

• 79% Would be highly disappointed if their kids couldn’t afford to go to collage, but 54% have saved less than $5,000 per child

• 40% expect at least 10 years of debt due to college expenses, meaning they are planning to finance through long-term debt, such as second mortgages

• Only 30% are using 529 College Savings Plans despite their significant tax advantages

• 54% were unfamiliar with 529s or unsure of how they work

• Of those using 529s, 44% have saved more than $10,000 per child. Compare that to those saving in other ways: 52% of those investing in CDs, 57% in stocks and bonds, and 59% in mutual funds have saved more than $10,000 per child

What these results mean is that parents who are saving a lot for college are generally not saving in the right place. By saving in taxable investments like CDs, stocks, bonds, and mutual funds, their savings will likely perform worse than if parents had invested in tax-advantageous 529s. It also means that parents who aren’t saving enough will be relying on long-term debt to finance their children’s education. As these parents age, it will likely mean that they will have to work longer, and defer their own retirement, to pay down this debt.

While part one on this topic has highlighted the results of The College Savings Foundation’s survey and some of its implications, the second part will discuss 529s in greater detail. Be sure to return to the Lending Club blog soon to see that discussion as well. Meanwhile, check out P2P loan portfolios on Lending Club as another way to put your money to work.