Lack of household saving plan leads to increased risk for student debt problems.
Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…
The interesting study
Is America’s student debt crisis really rooted in saving? Common wisdom would seem to suggest the crisis is a problem with borrowing, i.e. that there’s a problem with current student lending practices. This is why the government has taken so many actions to restructure interest rates and update lending practice regulations.
However, studies like the 10th Annual State of College Savings survey seem to point in the opposite direction. They indicate that no matter how fair lending practices are made, the problem is really rooted in the fact that parents and households are struggling to save.
The big result
The survey found that 88% of parents are planning to help fund their children’s college education. Almost nine out of ten parents are planning to cover all or part of the final bill their children would have to foot.
The issueis that half of that number (44% of parents) plans to borrow in order to provide that help.
The fascinating details
On the upside, 32% of parents say savings is the number one way that they plan to pay for college, which coincides with the fact that 32% of parents surveyed also report that they have a 529 college savings plan.
- 67% of parents are already saving for college
- 3/4 of that number already have more than $5,000 saved per child
For many of us in the past, the contributions parents made for college covered the lion’s share of the total education costs. That’s still true, however the amount students are expected to cover is increasing overall:
- 80% of parents expect children to help pay for college
- 57% expect children to contribute up to 1/3 of cost
- 27% want the student’s contributions to make up 1/3-2/3
- 16% expect the child to cover over 2/3
- 65% of parents expect child to get financial aid
- 74% of that amount is expected to come from scholarships and grants
This puts increased pressure on students to apply for scholarships and grants to cover their portion. While literally millions of such opportunities exist online, going through all that apply to you can be time-consuming and exhausting.
What you can do
“Following the financial crisis, many parents went from a relatively stable financial outlook with room for savings to living paycheck-to-paycheck with no money left for savings,” explains Gary Herman, President of Consolidated Credit. “As a result, they haven’t saved effectively for their children’s education costs. Now those children have an increased borrowing burden that comes to a head following graduation. It’s all rooted in the same issue.”
Herman encourages parents and students to sit down now to come up with practical solutions that fit each family’s financial situation today.
“Planning practical steps to take now even if you face a grim situation with little time to save will lead to significantly less headaches and financial upheaval down the road once a student graduates,” Herman continues. “It’s about assessing how much time you have to save, what you can accomplish in that time, and what you can do to adjust the situation so student debt isn’t such an insurmountable burden after graduation.”
In other words, if your children are still 5 years out from graduation, then you still have time to set up a 529 college savings plan and start contributing so the money has time to grow effectively. If your child is a junior or a senior that solution may not be as effective, in which case you need to plan ahead for extra time spent on online scholarship and grant applications.
You may also discuss adjusting further education plans, such as going through a two-year associate’s degree program to minimize cost and get out into the working world faster. Then look for jobs with benefits packages that include covering further education costs. It may delay your education, but allows you to find a path where the burden for education doesn’t rest solely on the shoulders of students and their parents.