Please ensure Javascript is enabled for purposes of website accessibility

Almost 40% of Parents Aren't Saving for This Key Milestone

By Maurie Backman - Mar 9, 2019 at 7:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And their children are apt to suffer for it later.

There are a lot of important goals in life to save for, and misplaced priorities -- or just bad money management -- can mean that many of us find ourselves neglecting something. If you've got kids, though, there's one important financial milestone you don't want to ignore: their college education. If you do, your put your kids at risk of racking up a mountain of student debt, and they may struggle throughout early adulthood as a result.

Consider this: An estimated 69% of students who graduated college in 2018 took out loans to finance their education, and they came away with an average debt pile of $29,800. Collectively, Americans owe more than $1.5 trillion in student loan debt, spread out among roughly 45 million individual borrowers. And the average indebted college grad is on the hook for a monthly student loan payment of $393 -- not a small amount of money to part with.

Building with columns


In fact, it's pretty common to hear the words "student debt" and "crisis" lobbed together, because the problem is that tremendous. Yet surprisingly, nearly 40% of parents today aren't saving money for their children's education, according to a new U-Nest study. This is in spite of the fact that 75% of parents agree that a debt-free education would no doubt increase their kids' chances for success in life.

If you've been putting off college savings, you should know that your children might rack up a pile of debt if you don't change your ways. On the flip side, if you start saving for college early enough, you just might spare your children the pain of having to borrow money for it in the first place.

Save now, celebrate later

It's hard to set aside money for college when life's more immediate expenses monopolize much of your income. But if you don't make college savings a priority when your children are young, you'll lose out on a key opportunity to amass some serious cash. Check out the following table, which shows what your college fund might grow to depending on your savings window at hand:

If You Start Saving $300 a Month When Your Child Is:

Here's What You'll Have When Your Child Turns 18 (Assumes a 7% Average Annual Return):












As you can see, saving $300 a month over a 17-year period will leave you with about $111,000 -- and that's enough money to cover four years of tuition and fees at a four-year public out-of-state college. It's also more than enough to cover tuition and fees plus room and board at a four-year public in-state college. But the longer you wait to start saving for college, the less you stand to end up with.

Now if you're wondering about the 7% average annual return on investment used in the table above, that figure is a couple of percentage points below the stock market's average. If you invest your college savings heavily in stocks, you stand a good chance of snagging that sort of return or better over an extended investment period.

How do you invest your college savings? A good bet is to open a 529 plan. These dedicated educational savings plans allow your money to grow tax-free so that as your investments earn a return, you're not paying taxes on those gains year after year.

For example, imagine you contribute $50,000 of your own money to a 529 over time so that it grows to $75,000. In a traditional brokerage investment account, you'd pay taxes on your $25,000 in gains. But with a 529, that money is yours free and clear, provided it's used for educational purposes. Furthermore, 529 plans allow you to switch beneficiaries so that if you overfund one child's account (say, because he or she ends up getting a scholarship), you can reserve those funds for another child. The only catch with 529s is that if you use your money for non-educational purposes, you'll face a 10% penalty on the withdrawals you take -- but only on the gains portion, and not your principal investment.

Of course, there are other college savings vehicles you can use in addition to 529s. You can put money in a regular savings account (though you'll generally get a much lower return on your cash), save in a traditional brokerage account (where you'll forgo the aforementioned tax benefit), or sock away funds in a Roth IRA (where you'll be limited to an annual contribution of either $6,000 or $7,000, depending on your age). You might even spread your savings around in a few different places. The point, either way, is to start saving for college as soon as you can -- before you run out of time and your children wind up saddled with debt as a result.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.