NEWARK, Del. (4/14/14)--Parents may be saving more for college this year than last--overall savings are up 7%--but the most-common vehicle they use to set aside the funds isn't the most effective.
According to Sallie Mae's fourth survey, "How America Saves for College 2014," 51% of families have established college savings funds. Retirement remains the dominant area for savings--53% of the savings are tucked away for retirement--and college savings come in 10%.
The report is based on Ipsos' nationally representative survey of 2,020 parents of children under age 18 conducted in November and December 2013 by Sallie Mae, a financial services provider specializing in education.
The average college savings account holds $15,346, up 30% from the 2013 survey. Forty-five percent of parents use a general savings account and checking accounts are at 27%.
Perhaps lesser known are the college-specific savings accounts such as 529 plans (29%), prepaid state college plans (14%) and Coverdell education savings accounts (13%).
The college-specific plans are the best vehicle, said Kimberly Foss, founder/president of Empyrion Wealth Management, Roseville, Calif. (MarketWatch April 10). "There aren't many reasons not to use it," she said. Tax-deferred investments in 529 plans are distributed tax-free at the federal level, and 34 states plus Washington, D.C., offer state income-tax deductions for the plans.
General savings accounts can't compete with the benefits of a 529 plans, Foss said, adding that 529 plans are treated favorably by colleges' financial aid offices.
Parents also should look into prepaid college tuition plans if they think their child will go to an in-state school. Only 14% of parents use these plans, according to Sallie Mae.
However, of the parents who are saving for their own retirement, 30% expect to break into that piggy bank to cover college costs. Foss discourages this plan. "Your kids can always find some way to get loans for school, but no one but you is going to finance your retirement," she told MarketWatch.